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Topic Title: Some Basic funding questions..
Created On Thu Mar 31, 11 02:35 PM
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DocToc
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Thu Mar 31, 11 02:35 PM
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Hi - I'm a bit lost about where to begin reading about 'Funding' as a topic. Books made pre-crisis pay little attention to it, are there any academic papers?
The previous posts on the forum here seem to take off from different places so it is quite difficult to follow what is going on..

If some one could point out a good place to begin reading about Funding (in terms of IR derivatives) I would be really grateful.

My understanding so far is..

(1). Pre Crisis - I had a unique discounting and forwarding curve. i.e. for a EURIBOR1M swap I could price this off my normal Curve say C(d). Both the forwards and discount factors for this could be generated from my curve C(d).

(2). Post Crisis - Because of the explosion of Basis Spreads I cant derive forwards of as EURIBOR1M swap from a curve vs 6's. So for different indices I need a different index. Say these forwarding curves are C(f1), C(f2),... BUT a unique discounting/funding curve. Is the usual choice for this funding curve C(d) = EONIA these days?
Does the choice of the discounting curve depend on what the percieved riskiness of say engaging into a swap with the counter party is? For example, if they were of poor credit quality I would assume if we are recieving the floating index I would discount these cash flows more heavily with say EONIA + spread to make the fixed rate we are paying lower?

Finally - this question is really stupid so brace yourself, why on earth is the discount curve called the funding curve? The only reason I can see for this is because this is rate at which you discount cash flows in the future so in essence reflects how much you can earn for investing $1 today for x periods forward i.e. the rate @ which you can fund yourself??


If some one experienced good guide me I would really appreciate that..

Thanks,
 
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Martinghoul
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Thu Mar 31, 11 03:49 PM
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These topics have been discussed here a LOT... Search and ye shall find.

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"Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness."
 
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DocToc
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Thu Mar 31, 11 05:21 PM
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Hmm - Thanks for your suggestion although I cant see a clear answer to my questions.
Would you mind suggesting if my broad thoughts are correct or misled in some way, as I am trying to put together terminology and ideas from not much.

Thanks again..
 
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Martinghoul
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Fri Apr 01, 11 10:38 AM
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Have you searched? I know for a fact that we discussed these subjects in some detail in a few threads... It's just really difficult to keep writing the same thing over and over again.

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"Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness."
 
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loooooo
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Fri Apr 01, 11 01:55 PM
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I can't grasp the understanding of your questions correctly. It's maybe because the topic itself is so broad for one to summarize in a sentence.
Why it is called a funding curve, to my understanding, is that such a curve is not primarily for discounting future cash flows but is a term-structure of funding cost for banks, and their counterparties who are involved in some sort of interest rate derivatives contracts with them.
But first you should narrow down a bit further. What are you actually trying to do with a funding curve? It has so many uses, you can apply to almost all areas (with little bit of exaggeration here though).
To me, it kinda sounds like "I've got T-bill rate data, but what information I can infer from it? or where can I apply that to?"
I think experts here are so much willing to help once the questions are in a clear/solid form so that the questions fall under the common realm of understanding. It's just that they don't really know what to say yet.
 
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DocToc
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Fri Apr 01, 11 09:32 PM
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Well to rephrase -

If I have a swap say its a payer and rates shoot up - this is deeply in the money to my advantage. I would obviously be facing LCH in this swap with my counterparty facing them from the otherside. Obviously my counterparty has to post a sufficient amount of collateral into my account at the LCH. What rate do I earn on this money? From what I have understood from different posts it is generally agreed that the money you pay to the counterparty or LCH on this amount is EONIA? This is the case when there is a CSA

With your average client off the street I am sure there is no CSA setup. Therefore, taking the above situation I would need to pay significantly more on this cash say EONIA + spread??

Thus in the above my funding index would be EONIA>

Edited: Fri Apr 01, 11 at 10:16 PM by DocToc
 
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TinMan
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Sat Apr 02, 11 12:55 AM
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I'm absolutely positive that this has been discussed many times here.

This may seem harsh to people coming to these issues for the first time, but they really have been beaten to death here and any insight you could possibly get is in those threads.

At the time it was interesting and all, but only because it happened so suddenly that it had to be dealt with in real time.
But once you take some time to think about it, anyone who grasps the fundamentals would get to the conclusion pretty quickly.

It's just frustrating to see the same questions that have been answered over and over come up repeatedly, when we know there have been pretty long threads on the issue.

It's like groundhog day sometimes, I mean how many threads THIS WEEK have been started on the subject of discounting/yield curves?
I think anyone willing to spend a reasonable amount of their own time will find all the answers they need with the search function.

If someone comes up with some new insight or problem all well and good, then post away, but like Martinghoul says, it's the same questions expecting people to post the same answers.
 
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