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Discounting Uncollateralized Swaps and Funding Valuation Adjustments

Article Quant Q&A · Author: Dana
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Summary

The note addresses how to value an uncollateralized swap when the bank must fund its exposure. It describes two equivalent framing choices: discount cash flows using a curve that reflects the bank’s unsecured funding rate, or use OIS discounting as the base and add a funding valuation adjustment for the difference between OIS and the unsecured funding curve. Three-month Libor is given as a practical proxy for the bank’s unsecured funding rate.

The discussion is brief and provides no worked example, market calibration procedure, or treatment of how funding interacts with credit valuation adjustments. It therefore offers a high-level valuation convention rather than a complete pricing framework. The appropriate funding rate is institution-specific, and the suggested proxy should not be read as a universal rate or as a resolution of all accounting and counterparty-risk considerations.

Key ideas

  • An uncollateralized swap valuation can reflect the bank’s own unsecured funding rate.
  • OIS discounting can serve as a base, with the funding difference represented as an FVA.
  • Three-month Libor is cited as a practical approximation of unsecured funding.
  • The note does not specify how to estimate funding rates or combine FVA with CVA and DVA.

Tags

Fixed incomeDerivatives pricingRisk management
Full text
# How do I value uncollaterised swaps?


# How do I value uncollaterised swaps?












Do I need to discount using the OIS curve?

Then add some sort of FVA adjustment over and above the CVA/DVA? How do I work out a banks cost of funding?

Any help would be greatly appreciated.

Thanks

## Answer by Antoine Conze (score 3)

https://quant.stackexchange.com/a/37917

An uncollateralized swap transaction should be valued at its own funding rate, which in practice means the bank unsecured funding rate, for instance approximated as 3M Libor. Alternatively use the OIS curve for the base valuation and mark the difference between 3M Libor discounting and OIS discounting as FVA.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.