Replication-Consistent Liquidity Forecasting for Derivatives -- Forward Funding Sensitivities and a Liquidity Valuation Adjustment for Settlement Lags
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arXiv
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| Natura: | Preprint |
| Pubblicazione: |
2026
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| _version_ | 1866914525834379264 |
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| author | Fries, Christian P. |
| author_facet | Fries, Christian P. |
| contents | We study cash-flow forecasting for derivatives used in liquidity management and clarify its relation to risk-neutral valuation and replication. While it is well known that expectations under different measures (e.g., $\mathbb{P}$ vs. $\mathbb{Q}$) can yield different undiscounted cash-flows, further inconsistencies arise when payment times are stochastic. We show that using discounting sensitivities (funding-curve hedge ratios) instead of "expected cash-flows" aligns forecasting with the self-financing replication strategy and avoids measure-mixing/aggregation issues. We then illustrate how a standard valuation model delivers pathwise funding requirements and propose a simple liquidity valuation adjustment to capture settlement lags and related timing frictions. The note provides implementation hints (American Monte Carlo with adjoint differentiation) and clarifies when "expected cash-flows" are informative and when sensitivities should be used instead. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2605_00862 |
| institution | arXiv |
| publishDate | 2026 |
| record_format | arxiv |
| spellingShingle | Replication-Consistent Liquidity Forecasting for Derivatives -- Forward Funding Sensitivities and a Liquidity Valuation Adjustment for Settlement Lags Fries, Christian P. Pricing of Securities Computational Finance Risk Management 91G20 G.3; I.6.8; G.1.4 We study cash-flow forecasting for derivatives used in liquidity management and clarify its relation to risk-neutral valuation and replication. While it is well known that expectations under different measures (e.g., $\mathbb{P}$ vs. $\mathbb{Q}$) can yield different undiscounted cash-flows, further inconsistencies arise when payment times are stochastic. We show that using discounting sensitivities (funding-curve hedge ratios) instead of "expected cash-flows" aligns forecasting with the self-financing replication strategy and avoids measure-mixing/aggregation issues. We then illustrate how a standard valuation model delivers pathwise funding requirements and propose a simple liquidity valuation adjustment to capture settlement lags and related timing frictions. The note provides implementation hints (American Monte Carlo with adjoint differentiation) and clarifies when "expected cash-flows" are informative and when sensitivities should be used instead. |
| title | Replication-Consistent Liquidity Forecasting for Derivatives -- Forward Funding Sensitivities and a Liquidity Valuation Adjustment for Settlement Lags |
| topic | Pricing of Securities Computational Finance Risk Management 91G20 G.3; I.6.8; G.1.4 |
| url | https://arxiv.org/abs/2605.00862 |