Funding Valuation Adjustment for a Fully Collateralized Netting Set

Summary

The document asks whether funding valuation adjustment (FVA) depends on the economic setting around a trade or follows mechanically from the netting set’s collateral status. It contrasts a common setup, where an uncollateralized position is hedged through a collateralized netting set, with a hypothetical firm that has only one perfectly collateralized netting set and no offsetting trades at other counterparties.

The central issue is whether collateral funding costs alone create FVA in that isolated portfolio, despite the usual example assigning zero FVA to a perfectly collateralized set. The document supplies no answer, formula, worked calculation, or evidence; it is a conceptual question that highlights ambiguity about the scope and interpretation of FVA. Resolving it would require specifying the valuation framework, funding assumptions, and how the entity’s collateral and hedges are represented. The prompt does not establish a general rule that can settle the question on its own.

Key ideas

• FVA is often introduced through an uncollateralized exposure hedged by a collateralized position.
• The document asks whether a perfectly collateralized set has zero FVA when it is the firm’s only netting set.
• It distinguishes collateral funding costs from the usual hedging context used to explain FVA.
• No formula or answer is provided, so the issue remains open without further modeling assumptions.

Tags

# FVA / fully collateralized netting set


# FVA / fully collateralized netting set












Usually a standard FVA example starts with an uncollateralized netting set that is hedged via a collateralized netting set, and because we have costs/benefits from the collateral, we say the FVA originates from the uncollateralized netting set. The uncollateralized netting set will have FVA but the perfectly collateralized netting set will have FVA=0 if perfectly collateralized. Intuitively, this is clear.

Let's assume a counterexample. A hypothetical trading company which has on its portflio only one netting set (i.e. it does no hedging with other cpties) and this netting set is fully collateralized (perfect collateralization). What would be the FVA in this case? In the first example, the FVA for a perfectly collateralized netting set would be 0 but in this case we still have the collateral funding costs but we don't have the "original" netting set that we are hedging.

My question more broadly is: does the economic context matter for FVA (which would imply we have FVA in the "counterexample"), or we just "blindly" apply the same formula, regardless of the context (we would have no FVA in the "counterexample")?

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

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