AbstractFunding is a cost to trading desks that they see as an input. Current FVA-related literature reflects this by also taking funding costs as an input, usually constant, and always risk-neutral. However, this funding curve is the output from a Treasury point of view. Treasury must consider Regulatory-required liquidity buffers, and both risk-neutral (Q) and physical measures (P). We describe the Treasury funding problem and optimize against both measures, using the Regulatory requirement as a constraint. We develop theoretically optimal strategies for Q and P, then demonstrate a combined approach in four markets (USD, JPY, EUR, GBP). Since we deal with physical measures we develop appropriate statistical tests, and demonstrate highly significant (p
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1310.3386.
Date of creation: Oct 2013
Date of revision: Aug 2014
Publication status: Published in Risk, 2014, 27(4), 64-69
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-10-18 (All new papers)
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- Andrea Pallavicini & Damiano Brigo, 2013. "Interest-Rate Modelling in Collateralized Markets: Multiple curves, credit-liquidity effects, CCPs," Papers 1304.1397, arXiv.org.
- Arturo Estrella & Mary R. Trubin, 2006. "The yield curve as a leading indicator: some practical issues," Current Issues in Economics and Finance, Federal Reserve Bank of New York, Federal Reserve Bank of New York, vol. 12(Jul).
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