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Numerix Offers Early Solution for Funding Value Adjustment

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Numerix has added a universal framework for funding value adjustment (FVA) calculations to the risk module of its CrossAsset pricing and risk analytics suite. The solution is aimed at helping firms calculate accurate FVA and identify the true profit and loss of OTC derivatives operations.

The Numerix implementation is among the first to support computation of the FVA calculation for arbitrary instrument types at both the trade and portfolio levels, and is initially expected to support banks and insurance companies with large positions and a concomitant requirement to understand funding risk.

There is no market consensus on how to report FVA or which funding rate to use, making the expense of funding difficult to manage. Satyam Kancharla, chief strategy officer and senior vice president at Numerix, says: “It is imperative that banks understand FVA, how it is calculated and the associated costs so they can make the best trading decisions for their business in terms of profitability.”

To date, many banks have been making their own calculations of FVA for specific products, but Numerix has built a universal solution covering a wide set of financial products and offering a quantitative way to identify the effects of funding on prices.

According to Steven O’Hanlon, CEO of Numerix, “As banks come to terms with the true cost of funding collateral and the significant role it plays in overall profitability, the Numerix approach gives users the tools and flexibility to apply FVA in a way that suits their specific needs and methodologies. With Numerix, institutions can not only measure and account for funding cost, but also more effectively manage how it could change over time due to a bank’s own credit quality. Ultimately, they can capture its impact on profit and loss.”

The Numerix FVA component is available immediately as part of the subscription to the risk module of CrossAsset and has been developed with Numerix’s sell-side and buy-side customers, some of which have moved into production. Kancharla says large firms are leading the way on FVA adoption, but more are following in a market where decisions on trades made solely on price quotes can be a bad move.

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