Research On Measurement Of Funding Value Adjustment Of Financial Institutions In China

Before the credit crisis,which began in 2008,Libor was considered the best agent for risk-free interest rates,at which banks were able to borrow freely and close to their funding costs.But in the wake of the financial crisis,banks no longer believe in Libor as the benchmark rate for financing and discounting,because in derivatives trading,foreclosure and risk aversion require money,and the financing costs are not the same for all parties.This leads to another adjustment in the value of derivatives,that is,the Funding Value Adjustment,is referred to as FVA for short.In fact,as early as 2013,JP Morgan Chase and large foreign banks with derivatives trading marked FVA in their financial statements.Derivatives trading in the wake of the financial crisis is much more complex because it requires careful and clear pricing to reflect all aspects of credit risk.At present,derivative pricing requires a variety of discount curves and large-scale simulation to calculate all the elements of counterparty credit risk.It is now standard practice to adjust derivatives prices to the risk of counterparty and its own default.In addition,banks know that considering financing collateral plays an important role in pricing portfolios.At present,the funding value adjustment is basically in investment banks or commercial banks with derivatives trading,because in the current situation,FVA exists in derivatives trading.Compared with foreign countries,China’s derivatives market has just started,Most banks have not yet been involved in derivatives,just a single traditional business,with only a few larger commercial banks involved in derivatives trading.However,with the promotion of interest rate marketization and the development of derivatives market in China,banks will diversify their business and involve derivatives trading,so they have to measure and study the funding value adjustment.Therefore,the measurement and study of FVA has an important driving force for the perfect derivatives market in ChinaFirst of all,this paper collates and summarizes the relevant literature at home and abroad,combing out the research status on funding value adjustment.On this basis,this paper studies the relevant theories and risks of over-the-counter derivatives market,and then introduces the reasons and specific implications of the debate on the funding value adjustment.Taking interest rate swap as an example,a simple method of funding value adjustment is given by using binary tree model,and then according to the implicit volatility,default probability and default loss rate selected in the model selection,The three parameters are sensitive to the funding value adjustment,and it is concluded that with the increase of implied volatility,the funding value adjustment will also increase,while with the increase of default probability and default loss rate,the funding value adjustment will decrease.Finally,some suggestions are put forward for China’s derivatives market based on the conclusions.