Funding Costs of Derivative Receivables on a Bank Balance Sheet
Summary
The document asks why a bank may incur a cost when it holds a positive derivative value as a receivable before cash settlement. It distinguishes the economic profit implied by a future payment from cash already available to the bank, and considers whether funding the gap through borrowing creates an interest expense. The examples describe receivables as carrying a funding cost and payables as potentially providing a funding benefit.
The discussion connects this issue to over-the-counter derivatives and the balance-sheet resources required while a contract remains outstanding. It raises the idea that the asset occupies capacity over time, but does not provide a definitive explanation, calculation, or quantitative evidence. The material is therefore a question framing the intuition behind funding valuation adjustments, not a worked treatment of collateral, discounting, capital requirements, or the exact funding model.
Key ideas
- A positive derivative value can appear as a receivable before the bank collects cash.
- The document asks how the funding cost of carrying that receivable arises.
- It contrasts receivable funding costs with possible funding benefits on payables.
- The examples associate the cost with financing and balance-sheet capacity, but the document does not resolve the mechanics.
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Full text
# Cost of receivable on bank balance sheet # Cost of receivable on bank balance sheet Consider the derivatives trading activities of a bank and the trading of a derivative contract where the cash settles at some future point in time - 'buying' the derivative is a promise to pay some amount of cash at a future date in exchange for receiving some commodity at that future date, and vice versa for 'selling'. In the scenario where the bank will 'buy' the derivative, then 'sell' that derivative for a higher amount, the result will be a a net cash profit to be received at a later point in time. I believe this appears as a receivable on the bank's balance sheet. I've seen numerous mentions that 'maintaining' this receivable on the balance sheet is a cost to the bank, but I don't understand what is meant by this. One example here: > We agree that in the case of a receivable, there is a funding cost C, and in the case of a payable, there is a funding benefit B. Another example here: > you made a pure profit which shows up as an asset on the bank balance sheet, offset by an increase in equity value of the bank. You are now using the resources of the bank to maintain your otc gold receivable, for which they need to charge you a cost of funding. In general, what is the 'cost' of 'maintaining' a receivable on the balance sheet, and how does it arise? Does it have something to do with the bank marking to market and then 'realising' or 'bringing forward' that receivable to become a cash amount in order to pay for operations (salaries, dividends, etc), done by borrowing money against that receivable and having to paying interest (the referred to cost) on that loan? Here is another example: > a derivative must remain on a bank’s balance sheet for the duration of the contract. Thus, there is an implicit cost to “renting” this space over a set period of time.
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