Hello all,
May I ask one question on FVA discount under the exposure approach? Say, we price a trade under OIS discounting, and obtain the future EE, then we compute FVA as,
FVA = Sum ( DiscountFactor * EE * Funding Spread * Accrual Factor )
What "DiscountFactor" should be used here? "OIS" ? Or "OIS + Funding Spread"?
Thank you!
Serving the Quantitative Finance Community
Re: FVA discount question...
If you are computing FVA, presumably you are trying to account for shareholder value only (and not 'whole bank' = shareholder + bondholder value). The correct discount factor is then OIS + funding spread + counterparty credit spread. Search for Mats Kjaer's 'Consistent XVA Metrics' papers on SSRN.