Risky funding: a unified framework for counterparty and liquidity risk

Morini, Massimo and Prampolini, Andrea (2010): Risky funding: a unified framework for counterparty and liquidity risk.

Abstract

Standard techniques for incorporating liquidity costs into the fair value of derivatives produce counter-intuitive results when credit risk of the counterparty (CVA) and of the investor (DVA) 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 to the funding strategy, including associated default risks.

• Item Type: MPRA Paper
• Language: English
• Keywords: counterparty risk; CVA; DVA; funding; liquidity; bond-CDS basis
• Subjects: G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing

References

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