An initial approach to Risk Management of Funding Costs

In this note we sketch an initial tentative approach to funding costs analysis and management for contracts with bilateral counterparty risk in a simplified setting. We depart from the existing literature by analyzing the issue of funding costs and benefits under the assumption that the associated risks cannot be hedged properly. We also model the treasury funding spread by means of a stochastic Weighted Cost of Funding Spread (WCFS) which helps describing more realistic financing policies of a ...