FVA Primer: Derivatives Pricing with Funding
Borrowing and lending activities are very common in normal business dealings. A business’ operation inevitably will involve borrowing: in managing its daily activities, such as purchasing raw materials and equipment, making payments, and expanding business dealings. For a financial institution, the borrowing activity would be even more important, in the sense that financial institutions are generally more leveraged than, for example, industrial companies. On top of borrowing, banks also lend out to customers, trying to make money from the “spreads” that customers pay for their loans and borrowings. In addition, banks also borrow and lend among themselves, forming an interbank market, or wholesale lending market.
KeywordsCredit Spread Trading Book Funding Cost Market Funding Risk Neutral Measure
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