This article studies derivatives pricing when privately financed by non-cash collateral. The liability-side posting collateral must weigh in haircuts stipulated in collateral agreements against those prevalent in the repo market and find the cheapest funded securities to post. The haircut difference is synthesized in the pricing PDE's discount rate and the impact of repo financing cost is captured by collateral liquidity value adjustment (LVA). Because a derivatives netting set's time horizon is much longer than repo tenors, a break-even repo formulae is employed to forecast the repo curve beyond three month tenor. Collateral optimization is formulated as an LVA driven linear programming problem.
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