# Funding Adjustments in Equity Linear Products

## TL;DR

This paper develops simple valuation formulas for total return equity swaps considering funding costs, collateral, and hedging strategies, enhancing the accuracy of profitability analysis in linear financial products.

## Contribution

It introduces a clear valuation framework and explicit formulas for funding adjustments in total return equity swaps with stock lending and borrowing.

## Key findings

- Derived explicit valuation formulas for equity swaps
- Enhanced understanding of funding costs impact on linear products
- Applicable to tight bid-ask spread environments

## Abstract

Valuation adjustments are nowadays a common practice to include credit and liquidity effects in option pricing. Funding costs arising from collateral procedures, hedging strategies and taxes are added to option prices to take into account the production cost of financial contracts so that a profitability analysis can be reliably assessed. In particular, when dealing with linear products, we need a precise evaluation of such contributions since bid-ask spreads may be very tight. In this paper we start from a general pricing framework inclusive of valuation adjustments to derive simple evaluation formulae for the relevant case of total return equity swaps when stock lending and borrowing is adopted as hedging strategy.