Landmarks in XVA
First published:
ISBN: 9781782722939
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Being Two-Faced over Counterparty Credit Risk
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
Counterparty credit risk is the risk that a counterparty in a financial contract will default prior to the expiration of the contract and fail to make future payments. Counterparty risk is taken by each party in an over-the-counter derivatives contract and is present in all asset classes, including interest rates, foreign exchange (FX), equity derivatives, commodities and credit derivatives. Given the decline in credit quality and heterogeneous concentration of credit exposure in the first decade of the 2000s, the high profile defaults of Enron, Parmalat, Bear Stearns and Lehman Brothers and write-downs associated with insurance purchased from monoline insurance companies, the topic of counterparty risk management remains ever important.
A typical financial institution, while making use of risk mitigants such as collateralisation and netting, will still take a significant amount of counterparty risk, which needs to be priced and risk managed appropriately. Since the late 1990s, financial institutions have built up their capabilities for handling counterparty risk and active hedging has also become common, largely in the form of buying credit default swap (CDS) protection to
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