The Handbook of Corporate Financial Risk Management (2nd Edition)
First published:
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xVA Optimisation
xVA Optimisation
Foreword
Introduction
Theory and Practice of Corporate Risk Management
Theory and Practice of Optimal Capital Structure
Introduction to Funding and Capital Structure
How to Obtain a Credit Rating
Refinancing Risk and Optimal Debt Maturity
Optimal Cash Position
Optimal Leverage
Introduction to Interest Rate and Inflation Risks
How to Develop an Interest Rate Risk Management Policy
How to Improve Your Fixed-Floating Mix and Duration
Interest Rates: The Most Efficient Hedging Product
Do You Need Inflation-linked Debt?
Prehedging Interest Rate Risk
Pension Fund Asset and Liability Management
Introduction to Currency Risk
How to Develop Currency Risk Management Policy
Translation or Transaction: Netting Currency Risks
Early Warning Signals
How to Hedge High Carry Currencies
Currency Risk on Covenants
Optimal Currency Composition of Debt 1: Protect Book Value
Optimal Currency Composition of Debt 2: Protect Leverage
Cyclicality of Currencies and Use of Options to Manage Credit Utilisation
Managing the Depegging Risk
Currency Risk in Luxury Goods
Introduction to Credit Risk
Counterparty Risk Methodology
Counterparty Risk Protection
Optimal Deposit Composition
Prehedging Credit Risk
xVA Optimisation
Introduction to M&A-related Risks
Risk Management for M&A
Deal-contingent Hedging
Introduction to Commodity Risk
Managing Commodity-linked Revenues and Currency Risk
Managing Commodity-linked Costs and Currency Risk
Commodity Input and Resulting Currency Risk
Offsetting Carbon Emissions
Introduction to Equity Risk
Hedging Dilution Risk
Hedging Deferred Compensation
Stake-building
UNCOLLATERALISED DERIVATIVES
Since the 2008 financial crisis, both regulatory environment and market practice have dramatically changed for derivative transactions, particularly when they are uncollateralised. Largely driven by the new Basel III regulation, banks have gradually introduced ever more prudent management of their derivative business via increased credit charges, liquidity buffers and capital consumption. In addition, market practice has changed among major banks, so that it reflects the funding conditions in a more realistic way. This has had a profound impact on both banks and corporates.
For banks, such changes have a significant impact on the cost of credit risk and the availability and pricing of financial resources (capital, funding, balance sheet) related to trading derivatives with uncollateralised counterparts. Uncertainty is high and has to be adequately compensated since banks have learnt to “expect the unexpected” when it comes to both market movements and regulatory changes. As a result, banks have reinforced their risk models and various charges (collectively called xVA) to offset those costs, while risks have increased.
The consequence for
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