Pricing of Derivatives Contracts under Collateral Agreements: Liquidity and funding value adjustments

by Antonio Castagna of iason. Ltd.

March 20, 2013

Abstract: We analyse the pricing of derivatives under a CSA agreement, without considering netting, minimum transfer amounts and thresholds. We come up with a decomposition of the total contract's value in a risk-free component, a liquidity value adjustment and a funding value adjustment. Implications for the organization of a dealing room are also investigated.

JEL Classification: G12, G13.

AMS Classification: 62H20, 91B70.

Keywords: collateral, CSA, liquidity value adjustment, LVA, funding value adjustment, FVA, derivatives, swap, FRA.

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