Cutting edge introduction: FVA out of balance

Some quants are arguing FVA should not be part of earnings

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In recent years, quants and practitioners have spent a lot of time and energy explaining why funding valuation adjustment (FVA) – the costs that arise when an uncollateralised trade is hedged with a collateralised one – should be part of derivatives pricing. They were so persuasive that at least 14 major banks now include it in their public accounts, but while there is consensus at a high level, valuation and reporting practices remain a bit of a mess (Risk April 2013 and Risk April 2014).

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