Funded Bilateral Valuation Adjustment

Abstract

We show how the cost of funding the collateral in a particular set up can be equal to the Bilateral Valuation Adjustment with the "funded" probability of default, leading to the definition of a Funded Bilateral Valuation Adjustment (FBVA). That set up can also be viewed by an investor as an effective way to restructure the counterparty risk arising from an uncollateralized transaction with a counterparty, mitigating or even avoiding entirely the additional capital charge introduced by the new Basel III framework.

10 pages, 3 figures