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Funding rate for pricing
I just thought about something.. and I think it doesnt make sense so I hope someone can point out my error.Suppose there are 2 firms, 1 AA rated and 1 BBB. AA funds at Libor while BBB funds at say Libor + 70(pardon me if I got this wrong).Now in pricing, the discount factor used is the funding rate, so it seems like the BBB firm will always be able to price products more competitively than the AA firm.. so a better rated firm will always lose out in flow trading?
Funding rate for pricing
You can always buy a CCC rated issue, I can tell you this will offer even more coupon (talking abt a structured note for example). Unfortunately...there is something called risk...(assuming you believe there is still a difference between AAA and CCC rated issuers...)Goodge
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- Martinghoul
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Funding rate for pricing
Mirror, I would agree that WACC would look better for a BBB company, but surely that's offset by the higher yield on its debt. What I'm trying to say, I suppose, is that it's all priced in. I could be wrong, though, fer sure...
Funding rate for pricing
that's correct. the different funding levels of banks can be an advantage or disadvantage. banks with expensive funding (ie libor ++) should be more competative on trades where they are long cash (ie where the trading dept. is net long and deposits with the treasury) so most FI derivs or products with a large cash component (zero coupons + options, etc). however expensive funding is a big disadvantage for any type of trade that requires the trading desk to go short cash (ie has a leverage component) in particular structured credit or fund derivs.