Munich Personal RePEc Archive

Multi-Curve Discounting

Nauta, Bert-Jan (2016): Multi-Curve Discounting.

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Abstract

This note considers the valuation of assets and liabilities on a balance sheet with liquidity risk. It introduces the multi-curve discounting (MCD) method, where the discount curve depends on the liquidity horizon of the asset. The difference between the value of an asset using OIS discounting and a discount curve referencing the liquidity horizon can be interpreted as a Funding Valuation Adjustment (FVA). We show that a simple model for liquidity risk implies MCD. The liquidity risk model formulation clarifies how a non-zero FVA occurs without violating the Modigliani-Miller theorem.

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