FVA should be included in derivatives pricing, say survey respondents

Nearly two thirds of survey respondents disagree with Hull and White’s argument that funding valuation adjustment should be ignored

Funding valuation adjustment (FVA) should be included in derivatives pricing, according to a majority of Risk.net readers – a view that conflicts with academics John Hull and Alan White, who feel funding costs should be ignored.

The issue burst into life earlier this year, when Hull and White contributed an article to Risk that argued traders should disregard FVA when making trading decisions. Some other academics agreed – if the cost of funding is taken into account, then it would essentially mean each price is unique, violating the so-called law of one price.

However, this view sparked angry protests from a number of practitioners, who argued such an approach would fly in the face of common sense.

"That's insane. They have totally lost the plot," said one senior European banker.

Hull and White themselves noted their original article generated a huge response, both for and against their view. "We've had more feedback on this than anything we've ever written," said Hull. "But we think there's a lack of precision in the thinking of those who object."

The majority of respondents disagree: 230, or 64%, felt FVA should be incorporated. But Hull and White also had their supporters – 127 of them, who agreed FVA should be disregarded.

The argument is unlikely to be resolved any time soon. A contributed article in the September issue of Risk by Stephen Laughton and Aura Vaisbrot of Royal Bank of Scotland offered a critique of the Hull and White argument. The following month, Hull and White published a response to their critics.