Landmarks in XVA
First published:
ISBN: 9781782722939
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Efficient XVA Management: Pricing, Hedging and Allocation
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
Banks must calculate and manage valuation adjustments (XVA) across their entire trading portfolio. XVA includes the effects of credit (CVA, DVA), funding (FVA, MVA) (Burgard and Kjaer 2013; Green and Kenyon 2015), capital (KVA) (Green et al 2014) and tax (TVA) (Kenyon and Green 2015).11Abbreviations are as follows: ∗VA is for valuation adjustment, where ∗ takes the following values and meanings: C, credit; D, debit; F, funding; M, margin; K, capital; T, tax; X, all, including those that have not yet been identified. XVA management includes allocation, hedging and pricing. Allocation refers to the allocation of XVA, and XVA hedging costs, to desks. Hedging costs require the computation of both first-order sensitivities and second-order sensitivities, such as interest rate-credit cross-gamma. Incremental allocation is required for daily trading.
Here, we provide an analytically rigorous method for managing XVA efficiently, which combines three elements: trade-level regression, analytic computation of sensitivities and global conditioning. Regression has been demonstrated in MVA to speed things up by one-to-two orders of magnitude, even on vanilla instruments for medium-sized
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