Illustrating a problem in the self-financing condition in two 2010-2011 papers on funding, collateral and discounting

We illustrate a problem in the self-financing condition used in the papers "Funding beyond discounting: collateral agreements and derivatives pricing" (Risk Magazine, February 2010) and "Partial Differential Equation Representations of Derivatives with Counterparty Risk and Funding Costs" (The Journal of Credit Risk, 2011). These papers state an erroneous self-financing condition. In the first paper, this is equivalent to assuming that the equity position is self-financing on its own and without including the cash position. In the second paper, this is equivalent to assuming that a subportfolio is self-financing on its own, rather than the whole portfolio. The error in the first paper is avoided when clearly distinguishing between price processes, dividend processes and gain processes. We present an outline of the derivation that yields the correct statement of the self-financing condition, clarifying the structure of the relevant funding accounts, and show that the final result in "Funding beyond discounting" is correct, even if the self-financing condition stated is not.Comment: added references, a footnote and updated abstrac

Hedge Funds: Heading for a regulatory hard landing? ECMI Policy Brief No. 5, April 2007

This policy brief examines the evolution of the hedge fund industry, the industry’s structure and the prospect of regulatory steps looming on the horizon. In the wake of the recent bust of Amaranth and of the increased ‘retailisation’ of the industry, hedge funds have increasingly come under the close scrutiny of regulators. In this ECMI Policy Brief, Charles Gottlieb explores the economic rationale that should be kept in mind for any appropriate policy making in this area. He concludes by outlining the regulatory uncertainties remaining with binding the hedge fund industry together with MiFID and UCITS regulations