Landmarks in XVA
First published:
ISBN: 9781782722939
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Regulatory Costs Remain
Regulatory Costs Remain
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
The central question for accounting fair value is the definition of exit price. Some components of this are clear, for example, executable screen prices. However, offsetting a trade is not equivalent to cancellation because of netting sets, capital, initial margin, leverage ratio, liquidity coverage ratio and so on. In practice, that means most exit prices are uncertain and unknown before they are realised. Exit prices are essentially quantum states whose waveform, or distribution, is collapsed instantly by the transaction, or gradually as maturity approaches. Regulators in Europe have already recognised uncertainty in accounting by proposing prudent valuation based on the 90th percentile of the distribution of accounting value (European Banking Authority 2013). Accountants follow the evidence of market practice, including new factors, such as funding valuation adjustments, as market consensus develops. Exit-price calculation usually requires extrapolation from many partial data sources such as Totem, collateral calls and novations, and there are elements of circularity and time lags in the exit-price definition as market practices develop.
There have been periods of stability of
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