So what exactly is the rate you are borrowing at to fund that derivative? January 16, 2014 at 10:14 pm
As everyone who has been paying attention knows, JPM had a $1.5B FVA hit in their most recent results. Matt Levine riffs amusingly if sometimes a little inaccurately* about a couple of aspects of this, my favourite part being:
there is… some gap between “my funding cost” and “FVA.” It’s unclear to me how much of JPMorgan’s model is based on their own funding costs and how much is based on some “market” funding cost; the earnings deck talks about “market funding rates” and “the existence of funding costs in market clearing levels,” so it seems that they’re thinking more about a market price of funding than they are about their own cost of funding.
Oh one fun fact about that. That earnings deck says that FVA “represents a spread over Libor”; based on [JPM CFO] Marianne Lake’s comments you can guess that that spread is around 50 basis points. That is, banks fund at around Libor plus 50 basis points.
Libor, you’ll recall, is supposed to be the rate at which banks can fund themselves.
I will resist the temptation to add a smilie.
*Hint: when a lawyer rights about how exactly Black Scholes works, you might want to apply a pinch of salt. Or read a careful account of the story, for instance here or here (where the key role of the replicating portfolio is explained – although I buy the Albanese ‘not fungible with debt’ argument).