Landmarks in XVA
First published:
ISBN: 9781782722939
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Regulatory Costs Break Risk Neutrality
Introduction
Preface to Chapter 1
Being Two-Faced over Counterparty Credit Risk
Risky Funding: A Unified Framework for Counterparty and Liquidity Charges
DVA for Assets
Pricing CDSs’ Capital Relief
The FVA Debate
The FVA Debate: Reloaded
Regulatory Costs Break Risk Neutrality
Risk Neutrality Stays
Regulatory Costs Remain
Funding beyond Discounting: Collateral Agreements and Derivatives Pricing
Cooking with Collateral
Options for Collateral Options
Partial Differential Equation Representations of Derivatives with Bilateral Counterparty Risk and Funding Costs
In the Balance
Funding Strategies, Funding Costs
The Funding Invariance Principle
Regulatory-Optimal Funding
Close-Out Convention Tensions
Funding, Collateral and Hedging: Arbitrage-Free Pricing with Credit, Collateral and Funding Costs
Bilateral Counterparty Risk with Application to Credit Default Swaps
KVA: Capital Valuation Adjustment by Replication
From FVA to KVA: Including Cost of Capital in Derivatives Pricing
Warehousing Credit Risk: Pricing, Capital and Tax
MVA by Replication and Regression
Smoking Adjoints: Fast Evaluation of Monte Carlo Greeks
Adjoint Greeks Made Easy
Bounding Wrong-Way Risk in Measuring Counterparty Risk
Wrong-Way Risk the Right Way: Accounting for Joint Defaults in CVA
Backward Induction for Future Values
A Non-Linear PDE for XVA by Forward Monte Carlo
Efficient XVA Management: Pricing, Hedging and Allocation
Accounting for KVA under IFRS 13
FVA Accounting, Risk Management and Collateral Trading
Derivatives Funding, Netting and Accounting
Managing XVA in the Ring-Fenced Bank
XVA: A Banking Supervisory Perspective
An Annotated Bibliography of XVA
Increased regulation and market changes since 2007 have altered the perceived costs of many financial products. Here we prove that these changes are not just perception: they have had a fundamental effect on pricing theory. That is, we prove a market-wide risk-neutral measure that is common to all participants does not exist. This proof is based on our Theorem 7.2, which states that if different market participants receive different dividends for holding the same stock, then there is no market-wide risk-neutral measure that is common to all market participants. We then demonstrate that, because of regulations and unhedgeable risks, different trading businesses have different holding costs for the same positions. This means that all valuations are private, in the sense that they can be derived from idiosyncratic risk-neutral measures (that is, the valuations are local to the individual pricing institution). Executable screen prices are components of value, not valuations by themselves, because of these idiosyncratic and asymmetric costs.
Legally binding regulations, eg, Capital Requirements Directive IV (CRD IV) in Europe (European Union 2013) and the Dodd–Frank Act in the US
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