We discuss a binary nature of funding impacts . Under some conditions, funding is either cost or benefit, i.e., one of the lending/borrowing rates does not play any role in pricing derivatives. When we price derivatives , considering different lending/borrowing rates leads to semi-linear BSDEs and PDEs, so we need to solve the equations numerically. However, once we can guarantee that only one of the rates affects pricing, we can recover linear equations and derive analytic formulae . Moreover, as a byproduct, our results explain how debt value adjustment (DVA) and funding benefits are different . It is often believed that  DVA and funding benefits are overlapped but it will be shown that the two components are affected by different mathematical structures of derivative transactions. We will see later that FBA occurs where the payoff is non-increasing , but this relationship becomes weaken as the funding choices of underlying assets are transferred to repo markets.
We discuss the binary nature of funding impact in derivative valuation . Under some conditions, funding is either a cost or a benefit, i.e., one of the lending/borrowing rates does not play a role in pricing derivatives. When derivatives are priced , considering different lending/borrowing rates leads to semi-linear BSDEs and PDEs, and thus it is necessary to solve the equations numerically. However, once it can be guaranteed that only one of the rates affects pricing, linear equations can be recovered and analytical formulae can be derived . Moreover, as a byproduct, our results explain how debt value adjustment (DVA) and funding benefits are dissimilar . It is often believed that considering both DVA and funding benefits results in a double-counting issue but it will be shown that the two components are affected by different mathematical structures of derivative transactions. We find that funding benefit is related to the decreasing property of the payoff function , but this relationship decreases as the funding choices of underlying assets are transferred to repo markets.
R
a
the
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impacts
impact in derivative valuation
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cost or
a cost or a
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any
a
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we price derivatives
derivatives are priced
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so we need
and thus it is necessary
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we can guarantee
it can be guaranteed
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we can recover linear equations and derive analytic formulae
linear equations can be recovered and analytical formulae can be derived
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different
dissimilar
A
considering both
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are overlapped
results in a double-counting issue
R
will see later that FBA occurs where the payoff is non-increasing
find that funding benefit is related to the decreasing property of the payoff function
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becomes weaken
decreases