Risky funding with counterparty and liquidity charges

Standard techniques for incorporating liquidity costs into the fair value of derivatives produce counter-intuitive results when the credit risk of the counterparty and the investor are added to the picture. Here, Massimo Morini and Andrea Prampolini show that a consistent framework can only be achieved by giving an explicit representation of the funding strategy, including associated default risks

The pricing of funding liquidity and the pricing of counterparty credit risk are closely related. Companies usually calculate a spread for funding costs that includes compensation for their own risk of default. However, interactions between the two are still poorly understood, while banks are in need of a sound framework to underpin consistent policies for charging funding and credit costs. In this article, we try to provide the cornerstones of a unified consistent framework for liquidity and

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact info@risk.net to find out more.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to Risk.net? View our subscription options

Most read articles loading...

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here