Landmarks in XVA
First published:
ISBN: 9781782722939
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MVA by Replication and Regression
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
Initial margins (IMs) are required by central counterparties (CCPs) and under Basel Committee for Banking Supervision (2013) between financials on all non-cleared derivatives. Regulatory IM is being phased in from September 2016 to September 2020 (BCBS/IOSCO 2015). IM is a cost when it must be funded, ie, when IM is one-sided (CCPs) or non-rehypothecable.11Basel Committee for Banking Supervision (2013) permits very limited rehypothecation. Usually, rehypothecation is forbidden and segregation mandated, because otherwise the risk mitigation of IM is easily lost. Here, we extend the semi-replication framework of (Burgard and Kjaer 2013) for funding and credit to include this margin valuation adjustment (MVA) alongside capital (Green et al 2014).
MVA computation requires expected IM over the lifetime of the portfolio. CCP IM can be based on historical value-at-risk (VaR) or conditional VaR (also known as expected shortfall (ES)), potentially requiring nested Monte Carlo. This can be tackled efficiently, starting from regression techniques (Longstaff and Schwartz 2001) adapted to retain accuracy for the large shocks required by VaR/ES. We introduce a simple augmentation for non
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