In defence of FVA – a response to Hull and White

In defence of FVA


In theory, derivatives pricing is a simple business, in which market-makers all agree on a single price, based on a risk-neutral expectation discounted at the risk-free rate. Since the crisis, this has become an increasingly poor description of reality, as prices have been adapted to reflect the funding costs of banks through a so-called funding valuation adjustment (FVA).

But this practice is controversial in some quarters as it leads to subjective prices, reflecting the different rates at whi

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