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Understanding Funding Valuation Adjustment for Uncollateralized FX Forwards

Article Quant Q&A · Author: dmitry
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Summary

This discussion frames Funding Valuation Adjustment (FVA) through an uncollateralized FX forward with a client, hedged by a bank under a Credit Support Annex. It asks what an FVA calculated from the trade’s expected exposure profile represents, given that the trade’s future value can vary substantially, and how the adjustment relates to funding risk. The key distinction raised is between funding exposure on the client-facing trade and the collateral terms of the hedge with the bank.

The document does not provide a resolution or a calculation method; it is a conceptual question rather than a worked analysis. It highlights why an FVA amount should not be interpreted as a hedge that matches every possible future mark-to-market, and asks whether valuation should be incremental to the client portfolio or attributed to the collateralized hedge. Answers would depend on funding assumptions, counterparty terms, netting, and the valuation framework, none of which are specified in the discussion.

Key ideas

  • FVA is considered for an uncollateralized client FX forward hedged through a collateralized bank trade.
  • The question connects expected exposure profiles to the meaning of an FVA valuation.
  • A future trade value can differ substantially from its FVA amount.
  • The discussion asks whether funding costs should be attributed to the client portfolio or the hedge agreement.
  • No definitive answer or quantitative method is supplied.

Tags

ForexDerivatives pricingRisk management
Full text
# Funding Valuation Adjustment (FVA) - understanding issues


# Funding Valuation Adjustment (FVA) - understanding issues












Having trouble with understanding the logic of FVA. Let's assume that as a trader I trade with a client an uncollateralised fx forward. Then, I hedge my position with "risk-free" bank with which I have a signed CSA.

- Having EE profile for the trade I calculate FVA and get some value. What is the meaning for this value? The future value of the trade may be much more or less than FVA. How does this value hedge funding risk?

- Why should I calculate FVA for the client's portfolio (e.g. incremental FVA)? It seems more logical to calculate FVA for the "risk-free" bank as funding risk comes from CSA agreement.

Any help is highly appreciated. Thanks.

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