{"product_id":"the-xva-challenge-9781119508977","title":"The xVA Challenge","description":"\u003cb\u003eBook Synopsis\u003c\/b\u003e\u003cbr\u003e\u003cbr\u003e\u003cbr\u003e\u003cb\u003eTable of Contents\u003c\/b\u003e\u003cbr\u003e\u003cp\u003eList of Spreadsheets xix\u003c\/p\u003e \u003cp\u003eList of Appendices xxi\u003c\/p\u003e \u003cp\u003eAcknowledgements xxiii\u003c\/p\u003e \u003cp\u003eAbout the Author xxv\u003c\/p\u003e \u003cp\u003e\u003cb\u003eSection 1 Basics\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003e1 Introduction 3\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003e2 Derivatives 5\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e2.1 Introduction 5\u003c\/p\u003e \u003cp\u003e2.2 The Derivatives Market 6\u003c\/p\u003e \u003cp\u003e2.2.1 Exchange-traded and OTC Derivatives 6\u003c\/p\u003e \u003cp\u003e2.2.2 Clearing 8\u003c\/p\u003e \u003cp\u003e2.2.3 Market Overview 9\u003c\/p\u003e \u003cp\u003e2.2.4 Market Participants and Collateralisation 11\u003c\/p\u003e \u003cp\u003e2.2.5 Banks and End Users 14\u003c\/p\u003e \u003cp\u003e2.2.6 ISDA Documentation 16\u003c\/p\u003e \u003cp\u003e2.2.7 Credit Derivatives 17\u003c\/p\u003e \u003cp\u003e2.2.8 Financial Weapons of Mass Destruction 18\u003c\/p\u003e \u003cp\u003e2.2.9 The Lehman Brothers Bankruptcy 19\u003c\/p\u003e \u003cp\u003e2.3 Derivative Risks 20\u003c\/p\u003e \u003cp\u003e2.3.1 Market Risk 21\u003c\/p\u003e \u003cp\u003e2.3.2 Credit Risk 21\u003c\/p\u003e \u003cp\u003e2.3.3 Operational and Legal Risk 22\u003c\/p\u003e \u003cp\u003e2.3.4 Liquidity Risk 22\u003c\/p\u003e \u003cp\u003e2.3.5 Integration of Risk Types 23\u003c\/p\u003e \u003cp\u003e2.3.6 Counterparty Risk 23\u003c\/p\u003e \u003cp\u003e2.4 Systemic Risk of Derivatives 24\u003c\/p\u003e \u003cp\u003e2.4.1 Overview 24\u003c\/p\u003e \u003cp\u003e2.4.2 Special Purpose Vehicles 24\u003c\/p\u003e \u003cp\u003e2.4.3 Derivatives Product Companies 25\u003c\/p\u003e \u003cp\u003e2.4.4 Monolines and CDPCs 26\u003c\/p\u003e \u003cp\u003e2.5 The Global Financial Crisis and Central Clearing of OTC Derivatives 28\u003c\/p\u003e \u003cp\u003e2.5.1 OTC Derivatives and the Crisis 28\u003c\/p\u003e \u003cp\u003e2.5.2 OTC Derivatives Clearing 29\u003c\/p\u003e \u003cp\u003e2.5.3 CCPs in the Global Financial Crisis 31\u003c\/p\u003e \u003cp\u003e2.5.4 The Clearing Mandate 32\u003c\/p\u003e \u003cp\u003e2.5.5 Bilateral Margin Requirements 33\u003c\/p\u003e \u003cp\u003e2.5.6 CCPs in Context 34\u003c\/p\u003e \u003cp\u003e2.6 Derivatives Risk Modelling 36\u003c\/p\u003e \u003cp\u003e2.6.1 Value-at-risk 36\u003c\/p\u003e \u003cp\u003e2.6.2 Models 38\u003c\/p\u003e \u003cp\u003e2.6.3 Correlation and Dependency 39\u003c\/p\u003e \u003cp\u003e\u003cb\u003e3 Counterparty Risk and Beyond 41\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e3.1 Counterparty Risk 41\u003c\/p\u003e \u003cp\u003e3.1.1 Counterparty Risk Versus Lending Risk 41\u003c\/p\u003e \u003cp\u003e3.1.2 Settlement, Pre-settlement, and Margin Period of Risk 42\u003c\/p\u003e \u003cp\u003e3.1.3 Mitigating Counterparty Risk 45\u003c\/p\u003e \u003cp\u003e3.1.4 Product Type 46\u003c\/p\u003e \u003cp\u003e3.1.5 Credit Limits 48\u003c\/p\u003e \u003cp\u003e3.1.6 Credit Value Adjustment 50\u003c\/p\u003e \u003cp\u003e3.1.7 What Does CVA Represent? 51\u003c\/p\u003e \u003cp\u003e3.1.8 Hedging Counterparty Risk and the CVA Desk 52\u003c\/p\u003e \u003cp\u003e3.2 Beyond Counterparty Risk 54\u003c\/p\u003e \u003cp\u003e3.2.1 Overview 54\u003c\/p\u003e \u003cp\u003e3.2.2 Economic Costs of a Derivative 54\u003c\/p\u003e \u003cp\u003e3.2.3 xVA Terms 55\u003c\/p\u003e \u003cp\u003e3.3 Components of xVA 57\u003c\/p\u003e \u003cp\u003e3.3.1 Overview 57\u003c\/p\u003e \u003cp\u003e3.3.2 Valuation and Mark-to-market 57\u003c\/p\u003e \u003cp\u003e3.3.3 Replacement Cost and Credit Exposure 58\u003c\/p\u003e \u003cp\u003e3.3.4 Default Probability, Credit Migration, and Credit Spreads 59\u003c\/p\u003e \u003cp\u003e3.3.5 Recovery and Loss Given Default 60\u003c\/p\u003e \u003cp\u003e3.3.6 Funding, Collateral, and Capital Costs 61\u003c\/p\u003e \u003cp\u003e\u003cb\u003e4 Regulation 63\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e4.1 Regulation and the Global Financial Crisis 63\u003c\/p\u003e \u003cp\u003e4.2 Capital Requirements 64\u003c\/p\u003e \u003cp\u003e4.2.1 Overview 64\u003c\/p\u003e \u003cp\u003e4.2.2 Capital Ratios 65\u003c\/p\u003e \u003cp\u003e4.2.3 Risk Type 67\u003c\/p\u003e \u003cp\u003e4.2.4 Market Risk Capital 68\u003c\/p\u003e \u003cp\u003e4.2.5 CVA Capital 69\u003c\/p\u003e \u003cp\u003e4.2.6 CCR Capital 70\u003c\/p\u003e \u003cp\u003e4.2.7 Leverage Ratio 70\u003c\/p\u003e \u003cp\u003e4.2.8 Capital Floors 71\u003c\/p\u003e \u003cp\u003e4.2.9 Large Exposure Framework 72\u003c\/p\u003e \u003cp\u003e4.2.10 Bank Stress Tests 73\u003c\/p\u003e \u003cp\u003e4.2.11 Prudent Valuation 73\u003c\/p\u003e \u003cp\u003e4.3 Liquidity 73\u003c\/p\u003e \u003cp\u003e4.3.1 Overview 73\u003c\/p\u003e \u003cp\u003e4.3.2 High-quality Liquid Assets 74\u003c\/p\u003e \u003cp\u003e4.3.3 Liquidity Coverage Ratio 75\u003c\/p\u003e \u003cp\u003e4.3.4 Net Stable Funding Ratio 76\u003c\/p\u003e \u003cp\u003e4.4 Clearing and Margining 77\u003c\/p\u003e \u003cp\u003e4.4.1 Central Clearing 77\u003c\/p\u003e \u003cp\u003e4.4.2 Bilateral Margin Requirements 81\u003c\/p\u003e \u003cp\u003e4.4.3 Exemptions 82\u003c\/p\u003e \u003cp\u003e4.4.4 CCP Capital Requirements 84\u003c\/p\u003e \u003cp\u003e\u003cb\u003e5 What is xVA? 85\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e5.1 Overview 85\u003c\/p\u003e \u003cp\u003e5.2 Analysis of xVA 86\u003c\/p\u003e \u003cp\u003e5.2.1 Definition 86\u003c\/p\u003e \u003cp\u003e5.2.2 Components 86\u003c\/p\u003e \u003cp\u003e5.2.3 Why Valuation Adjustments? 87\u003c\/p\u003e \u003cp\u003e5.2.4 Mark-to-market and xVA as a Cost (and Benefit) 88\u003c\/p\u003e \u003cp\u003e5.2.5 xVAs by Transaction Type 90\u003c\/p\u003e \u003cp\u003e5.2.6 Overlaps and Portfolio Effects 91\u003c\/p\u003e \u003cp\u003e5.2.7 CVA is the Least Real Valuation Adjustment 92\u003c\/p\u003e \u003cp\u003e5.3 Valuation 93\u003c\/p\u003e \u003cp\u003e5.3.1 Price and Value 93\u003c\/p\u003e \u003cp\u003e5.3.2 xVA Markets 94\u003c\/p\u003e \u003cp\u003e5.3.3 Accounting Standards 95\u003c\/p\u003e \u003cp\u003e5.3.4 Accounting Trends 98\u003c\/p\u003e \u003cp\u003e5.3.5 Totem 99\u003c\/p\u003e \u003cp\u003e5.3.6 Contractual Terms and Value 100\u003c\/p\u003e \u003cp\u003e5.4 Pricing 100\u003c\/p\u003e \u003cp\u003e5.4.1 Reality or Creating the Right Incentive? 100\u003c\/p\u003e \u003cp\u003e5.4.2 Approach for Capital 101\u003c\/p\u003e \u003cp\u003e5.4.3 Approach to Regulatory Ratios 102\u003c\/p\u003e \u003cp\u003e5.4.4 Lack of Arbitrage 104\u003c\/p\u003e \u003cp\u003e5.4.5 Entry and Exit Pricing 105\u003c\/p\u003e \u003cp\u003e5.4.6 xVA Quantification 106\u003c\/p\u003e \u003cp\u003e5.4.7 Special Cases 106\u003c\/p\u003e \u003cp\u003e\u003cb\u003eSection 2 Risk Mitigation\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003e6 Netting, Close-Out, and Related Aspects 111\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e6.1 Overview 111\u003c\/p\u003e \u003cp\u003e6.2 Cash Flow Netting 112\u003c\/p\u003e \u003cp\u003e6.2.1 Payment Netting 112\u003c\/p\u003e \u003cp\u003e6.2.2 Currency Netting and CLS 113\u003c\/p\u003e \u003cp\u003e6.2.3 Clearing Rings 114\u003c\/p\u003e \u003cp\u003e6.2.4 Portfolio Compression 115\u003c\/p\u003e \u003cp\u003e6.2.5 Compression Algorithm 118\u003c\/p\u003e \u003cp\u003e6.2.6 Benefits of Cashflow Netting 120\u003c\/p\u003e \u003cp\u003e6.3 Value Netting 121\u003c\/p\u003e \u003cp\u003e6.3.1 Overview 121\u003c\/p\u003e \u003cp\u003e6.3.2 Close-out Netting 121\u003c\/p\u003e \u003cp\u003e6.3.3 Payment Under Close-out 122\u003c\/p\u003e \u003cp\u003e6.3.4 Close-out and xVA 124\u003c\/p\u003e \u003cp\u003e6.3.5 ISDA Definitions 125\u003c\/p\u003e \u003cp\u003e6.3.6 Set-off 129\u003c\/p\u003e \u003cp\u003e6.4 The Impact of Netting 130\u003c\/p\u003e \u003cp\u003e6.4.1 Risk Reduction 130\u003c\/p\u003e \u003cp\u003e6.4.2 The Impact of Netting 131\u003c\/p\u003e \u003cp\u003e6.4.3 Multilateral Netting and Bifurcation 132\u003c\/p\u003e \u003cp\u003e6.4.4 Netting Impact on Other Creditors 135\u003c\/p\u003e \u003cp\u003e\u003cb\u003e7 Margin (Collateral) and Settlement 137\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e7.1 Termination and Reset Features 137\u003c\/p\u003e \u003cp\u003e7.1.1 Break Clauses 137\u003c\/p\u003e \u003cp\u003e7.1.2 Resettable Transactions 140\u003c\/p\u003e \u003cp\u003e7.2 Basics of Margin\/Collateral 141\u003c\/p\u003e \u003cp\u003e7.2.1 Terminology 141\u003c\/p\u003e \u003cp\u003e7.2.2 Rationale 142\u003c\/p\u003e \u003cp\u003e7.2.3 Variation Margin and Initial Margin 144\u003c\/p\u003e \u003cp\u003e7.2.4 Method of Transfer and Remuneration 145\u003c\/p\u003e \u003cp\u003e7.2.5 Rehypothecation and Segregation 147\u003c\/p\u003e \u003cp\u003e7.2.6 Settle to Market 150\u003c\/p\u003e \u003cp\u003e7.2.7 Valuation Agent, Disputes, and Reconciliations 151\u003c\/p\u003e \u003cp\u003e7.3 Margin Terms 152\u003c\/p\u003e \u003cp\u003e7.3.1 The Credit Support Annex 152\u003c\/p\u003e \u003cp\u003e7.3.2 Types of CSA 153\u003c\/p\u003e \u003cp\u003e7.3.3 Margin Call Frequency 154\u003c\/p\u003e \u003cp\u003e7.3.4 Threshold, Initial Margin, and the Minimum Transfer Amount 155\u003c\/p\u003e \u003cp\u003e7.3.5 Margin Types and Haircuts 157\u003c\/p\u003e \u003cp\u003e7.3.6 Credit Support Amount Calculations 161\u003c\/p\u003e \u003cp\u003e7.3.7 Impact of Margin on Exposure 163\u003c\/p\u003e \u003cp\u003e7.3.8 Traditional Margin Practices in Bilateral and Centrally-cleared Markets 165\u003c\/p\u003e \u003cp\u003e7.4 Bilateral Margin Requirements 166\u003c\/p\u003e \u003cp\u003e7.4.1 General Requirements 166\u003c\/p\u003e \u003cp\u003e7.4.2 Phase-in and Coverage 168\u003c\/p\u003e \u003cp\u003e7.4.3 Initial Margin and Haircut Calculations 169\u003c\/p\u003e \u003cp\u003e7.4.4 Eligible Assets and Haircuts 171\u003c\/p\u003e \u003cp\u003e7.4.5 Implementation and Impact of the Requirements 172\u003c\/p\u003e \u003cp\u003e7.5 Impact of Margin 173\u003c\/p\u003e \u003cp\u003e7.5.1 Impact on Other Creditors 173\u003c\/p\u003e \u003cp\u003e7.5.2 Market Risk and Margin Period of Risk 174\u003c\/p\u003e \u003cp\u003e7.5.3 Liquidity, FX, and Wrong-way Risks 178\u003c\/p\u003e \u003cp\u003e7.5.4 Legal and Operational Risks 179\u003c\/p\u003e \u003cp\u003e7.6 Margin and Funding 180\u003c\/p\u003e \u003cp\u003e7.6.1 Overview 180\u003c\/p\u003e \u003cp\u003e7.6.2 Margin and Funding Liquidity Risk 181\u003c\/p\u003e \u003cp\u003e\u003cb\u003e8 Central Clearing 185\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e8.1 Evolution of Central Clearing 185\u003c\/p\u003e \u003cp\u003e8.1.1 Exchange Trading 185\u003c\/p\u003e \u003cp\u003e8.1.2 Evolution of Complete Clearing 186\u003c\/p\u003e \u003cp\u003e8.1.3 What is a CCP? 187\u003c\/p\u003e \u003cp\u003e8.2 Mechanics of Central Clearing 189\u003c\/p\u003e \u003cp\u003e8.2.1 Landscape 189\u003c\/p\u003e \u003cp\u003e8.2.2 Novation 191\u003c\/p\u003e \u003cp\u003e8.2.3 Multilateral Offset and Compression 192\u003c\/p\u003e \u003cp\u003e8.2.4 Margin and Default Funds 194\u003c\/p\u003e \u003cp\u003e8.2.5 Clearing Relationships 195\u003c\/p\u003e \u003cp\u003e8.3 CCP Risk Management 197\u003c\/p\u003e \u003cp\u003e8.3.1 Overview and Membership Requirements 197\u003c\/p\u003e \u003cp\u003e8.3.2 Margin 198\u003c\/p\u003e \u003cp\u003e8.3.3 Default Scenarios and Margin Period of Risk 199\u003c\/p\u003e \u003cp\u003e8.3.4 The Loss Waterfall 202\u003c\/p\u003e \u003cp\u003e8.3.5 Comparing Bilateral and Central Clearing 204\u003c\/p\u003e \u003cp\u003e8.4 Initial Margin and Default Funds 205\u003c\/p\u003e \u003cp\u003e8.4.1 Coverage of Initial Margin and Default Funds 205\u003c\/p\u003e \u003cp\u003e8.4.2 Default Fund Versus Initial Margin 206\u003c\/p\u003e \u003cp\u003e8.4.3 Default Fund Coverage 207\u003c\/p\u003e \u003cp\u003e8.5 Impact of Central Clearing 209\u003c\/p\u003e \u003cp\u003e8.5.1 Advantages and Disadvantages of Central Clearing 209\u003c\/p\u003e \u003cp\u003e8.5.2 Will Mandatory Clearing Kill Credit Value Adjustment? 210\u003c\/p\u003e \u003cp\u003e\u003cb\u003e9 Initial Margin Methodologies 213\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e9.1 Role of Initial Margin 213\u003c\/p\u003e \u003cp\u003e9.1.1 Purpose 213\u003c\/p\u003e \u003cp\u003e9.1.2 Margin Period of Risk 215\u003c\/p\u003e \u003cp\u003e9.1.3 Coverage: Quantitative and Qualitative 217\u003c\/p\u003e \u003cp\u003e9.1.4 Haircuts 218\u003c\/p\u003e \u003cp\u003e9.1.5 Linkage to Credit Quality 218\u003c\/p\u003e \u003cp\u003e9.1.6 Cross-margining 220\u003c\/p\u003e \u003cp\u003e9.2 Initial Margin Approaches 222\u003c\/p\u003e \u003cp\u003e9.2.1 Simple Approaches 222\u003c\/p\u003e \u003cp\u003e9.2.2 SPAN\u003csup\u003e®\u003c\/sup\u003e 223\u003c\/p\u003e \u003cp\u003e9.2.3 Value-at-risk and Expected Shortfall 227\u003c\/p\u003e \u003cp\u003e9.3 Historical Simulation 229\u003c\/p\u003e \u003cp\u003e9.3.1 Overview 229\u003c\/p\u003e \u003cp\u003e9.3.2 Look-back Period 230\u003c\/p\u003e \u003cp\u003e9.3.3 Relative and Absolute Returns 231\u003c\/p\u003e \u003cp\u003e9.3.4 Volatility Scaling 233\u003c\/p\u003e \u003cp\u003e9.3.5 Procyclicality 234\u003c\/p\u003e \u003cp\u003e9.3.6 Current CCP Methodologies 239\u003c\/p\u003e \u003cp\u003e9.3.7 Computational Considerations 241\u003c\/p\u003e \u003cp\u003e9.4 Bilateral Margin and SIMM 242\u003c\/p\u003e \u003cp\u003e9.4.1 Overview 242\u003c\/p\u003e \u003cp\u003e9.4.2 Standard Schedules 244\u003c\/p\u003e \u003cp\u003e9.4.3 Variance-covariance Approaches 245\u003c\/p\u003e \u003cp\u003e9.4.4 The ISDA SIMM 249\u003c\/p\u003e \u003cp\u003e9.4.5 Implementation of Bilateral Margin Requirements 252\u003c\/p\u003e \u003cp\u003e\u003cb\u003e10 The Impact and Risk of Clearing and Margining 255\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e10.1 Risks of Central Clearing 256\u003c\/p\u003e \u003cp\u003e10.1.1 Historical CCP Problems 256\u003c\/p\u003e \u003cp\u003e10.1.2 The 1987 Stock Market Crash 258\u003c\/p\u003e \u003cp\u003e10.1.3 The 2018 Nasdaq Case 259\u003c\/p\u003e \u003cp\u003e10.1.4 Risks Faced by CCPs 260\u003c\/p\u003e \u003cp\u003e10.1.5 Risks Caused by CCPs 261\u003c\/p\u003e \u003cp\u003e10.2 Analysis of a CCP Loss Structure 262\u003c\/p\u003e \u003cp\u003e10.2.1 Review of the Loss Waterfall 262\u003c\/p\u003e \u003cp\u003e10.2.2 Impact of Default Fund Exposure 264\u003c\/p\u003e \u003cp\u003e10.2.3 The Prisoner’s Dilemma and AIPs 265\u003c\/p\u003e \u003cp\u003e10.2.4 Other Loss Allocation Methods 267\u003c\/p\u003e \u003cp\u003e10.3 Impact of Margin 271\u003c\/p\u003e \u003cp\u003e10.3.1 Background and Historical Examples 271\u003c\/p\u003e \u003cp\u003e10.3.2 Variation Margin 273\u003c\/p\u003e \u003cp\u003e10.3.3 Initial Margin 275\u003c\/p\u003e \u003cp\u003e10.3.4 Cost and xVA 276\u003c\/p\u003e \u003cp\u003e10.3.5 Seniority 277\u003c\/p\u003e \u003cp\u003e10.3.6 Bilateral and Cleared Markets 277\u003c\/p\u003e \u003cp\u003e\u003cb\u003eSection 3 Building Blocks\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003e11 Future Value and Exposure 283\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e11.1 Credit Exposure 283\u003c\/p\u003e \u003cp\u003e11.1.1 Positive and Negative Exposure 283\u003c\/p\u003e \u003cp\u003e11.1.2 Definition of Value 284\u003c\/p\u003e \u003cp\u003e11.1.3 Current and Potential Future Exposure 285\u003c\/p\u003e \u003cp\u003e11.1.4 Nature of Exposure 286\u003c\/p\u003e \u003cp\u003e11.1.5 Metrics 288\u003c\/p\u003e \u003cp\u003e11.2 Drivers of Exposure 292\u003c\/p\u003e \u003cp\u003e11.2.1 Future Uncertainty 292\u003c\/p\u003e \u003cp\u003e11.2.2 Cash Flow Frequency 293\u003c\/p\u003e \u003cp\u003e11.2.3 Curve Shape 294\u003c\/p\u003e \u003cp\u003e11.2.4 Moneyness 297\u003c\/p\u003e \u003cp\u003e11.2.5 Combination of Profiles 298\u003c\/p\u003e \u003cp\u003e11.2.6 Optionality 299\u003c\/p\u003e \u003cp\u003e11.2.7 Credit Derivatives 300\u003c\/p\u003e \u003cp\u003e11.3 Aggregation, Portfolio Effects, and the Impact of Collateralisation 302\u003c\/p\u003e \u003cp\u003e11.3.1 The Impact of Aggregation on Exposure 302\u003c\/p\u003e \u003cp\u003e11.3.2 Off-market Portfolios 304\u003c\/p\u003e \u003cp\u003e11.3.3 Impact of Margin 305\u003c\/p\u003e \u003cp\u003e11.4 Funding, Rehypothecation, and Segregation 308\u003c\/p\u003e \u003cp\u003e11.4.1 Funding Costs and Benefits 308\u003c\/p\u003e \u003cp\u003e11.4.2 Differences Between Funding and Credit Exposure 309\u003c\/p\u003e \u003cp\u003e11.4.3 Impact of Segregation and Rehypothecation 310\u003c\/p\u003e \u003cp\u003e11.4.4 Impact of Margin on Exposure and Funding 312\u003c\/p\u003e \u003cp\u003e\u003cb\u003e12 Credit Spreads, Default Probabilities, and LGDs 315\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e12.1 Default Probability 315\u003c\/p\u003e \u003cp\u003e12.1.1 Real World and Risk Neutral 315\u003c\/p\u003e \u003cp\u003e12.1.2 CVA and Risk-neutral Default Probabilities 316\u003c\/p\u003e \u003cp\u003e12.1.3 Defining Risk-neutral Default Probabilities 319\u003c\/p\u003e \u003cp\u003e12.1.4 Loss Given Default 321\u003c\/p\u003e \u003cp\u003e12.2 Credit Curve Mapping 323\u003c\/p\u003e \u003cp\u003e12.2.1 Overview 323\u003c\/p\u003e \u003cp\u003e12.2.2 The CDS Market 324\u003c\/p\u003e \u003cp\u003e12.2.3 Loss Given Default 326\u003c\/p\u003e \u003cp\u003e12.2.4 General Approach 327\u003c\/p\u003e \u003cp\u003e12.3 Generic Curve Construction 330\u003c\/p\u003e \u003cp\u003e12.3.1 General Approach 330\u003c\/p\u003e \u003cp\u003e12.3.2 Intersection (Bucketing) Approach 332\u003c\/p\u003e \u003cp\u003e12.3.3 Cross-section Methodology 334\u003c\/p\u003e \u003cp\u003e12.3.4 Curve Shape, Interpolation, and Indices 336\u003c\/p\u003e \u003cp\u003e12.3.5 Third-party Providers 337\u003c\/p\u003e \u003cp\u003e12.3.6 Hedging 338\u003c\/p\u003e \u003cp\u003e\u003cb\u003e13 Regulatory Methodologies 339\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e13.1 Overview 339\u003c\/p\u003e \u003cp\u003e13.2 Credit Risk (Default Risk) Capital 341\u003c\/p\u003e \u003cp\u003e13.2.1 Standardised Approach 341\u003c\/p\u003e \u003cp\u003e13.2.2 Internal Ratings-based Approach 342\u003c\/p\u003e \u003cp\u003e13.2.3 Guarantees 343\u003c\/p\u003e \u003cp\u003e13.3 CVA (Market Risk) Capital 343\u003c\/p\u003e \u003cp\u003e13.3.1 The CVA Capital Charge 343\u003c\/p\u003e \u003cp\u003e13.3.2 Standardised CVA Risk Capital Charge 344\u003c\/p\u003e \u003cp\u003e13.3.3 BA-CVA 345\u003c\/p\u003e \u003cp\u003e13.3.4 Advanced CVA Capital Risk Charge 348\u003c\/p\u003e \u003cp\u003e13.3.5 SA-CVA 351\u003c\/p\u003e \u003cp\u003e13.3.6 Capital Relief and EU Exemptions 355\u003c\/p\u003e \u003cp\u003e13.4 Exposure Calculation Methodologies 356\u003c\/p\u003e \u003cp\u003e13.4.1 Exposure at Default 356\u003c\/p\u003e \u003cp\u003e13.4.2 Current Exposure Method 358\u003c\/p\u003e \u003cp\u003e13.4.3 Standardised Approach for Counterparty Credit Risk 361\u003c\/p\u003e \u003cp\u003e13.4.4 Broader Impact of SA-CCR 366\u003c\/p\u003e \u003cp\u003e13.4.5 The Internal Model Method 367\u003c\/p\u003e \u003cp\u003e13.4.6 The Leverage Ratio 372\u003c\/p\u003e \u003cp\u003e13.4.7 Wrong-way Risk 373\u003c\/p\u003e \u003cp\u003e13.5 Examples 374\u003c\/p\u003e \u003cp\u003e13.5.1 Comparison of EAD Methods 374\u003c\/p\u003e \u003cp\u003e13.5.2 Comparison of Capital Charges 377\u003c\/p\u003e \u003cp\u003e13.5.3 Impact of Hedges 379\u003c\/p\u003e \u003cp\u003e13.6 Central Counterparty Capital Requirements 384\u003c\/p\u003e \u003cp\u003e13.6.1 Background 384\u003c\/p\u003e \u003cp\u003e13.6.2 Trade Exposure 385\u003c\/p\u003e \u003cp\u003e13.6.3 Default Fund Exposure 385\u003c\/p\u003e \u003cp\u003e13.6.4 Client Clearing 386\u003c\/p\u003e \u003cp\u003e\u003cb\u003e14 Funding, Margin, and Capital Costs 389\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e14.1 Bank Financing 389\u003c\/p\u003e \u003cp\u003e14.2 Capital 391\u003c\/p\u003e \u003cp\u003e14.2.1 Minimum Capital Ratios and Capital Costs 391\u003c\/p\u003e \u003cp\u003e14.2.2 Leverage Ratio 393\u003c\/p\u003e \u003cp\u003e14.2.3 Cost of Capital 394\u003c\/p\u003e \u003cp\u003e14.3 Funding 394\u003c\/p\u003e \u003cp\u003e14.3.1 Overview 394\u003c\/p\u003e \u003cp\u003e14.3.2 Cost of Funding 398\u003c\/p\u003e \u003cp\u003e14.3.3 The Risk-free Rate, IBOR, and OIS 400\u003c\/p\u003e \u003cp\u003e14.3.4 IBOR Transition 402\u003c\/p\u003e \u003cp\u003e14.3.5 Funding Spreads 403\u003c\/p\u003e \u003cp\u003e14.3.6 NSFR and LCR 406\u003c\/p\u003e \u003cp\u003e14.3.7 Accounting 406\u003c\/p\u003e \u003cp\u003e\u003cb\u003e15 Quantifying Exposure 409\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e15.1 Methods for Quantifying Exposure 409\u003c\/p\u003e \u003cp\u003e15.1.1 Overview 409\u003c\/p\u003e \u003cp\u003e15.1.2 Parametric Approaches 410\u003c\/p\u003e \u003cp\u003e15.1.3 Semianalytical Methods 411\u003c\/p\u003e \u003cp\u003e15.1.4 Monte Carlo Simulation 414\u003c\/p\u003e \u003cp\u003e15.2 Exposure Allocation 414\u003c\/p\u003e \u003cp\u003e15.2.1 Overview 414\u003c\/p\u003e \u003cp\u003e15.2.2 Incremental and Marginal Exposure 414\u003c\/p\u003e \u003cp\u003e15.2.3 Impact of Dependency 417\u003c\/p\u003e \u003cp\u003e15.3 Monte Carlo Methodology 419\u003c\/p\u003e \u003cp\u003e15.3.1 Basic Framework 419\u003c\/p\u003e \u003cp\u003e15.3.2 Revaluation, Cash Flow Bucketing, and Scaling 421\u003c\/p\u003e \u003cp\u003e15.3.3 Risk-neutral or Physical Measure 423\u003c\/p\u003e \u003cp\u003e15.3.4 Aggregation Level 429\u003c\/p\u003e \u003cp\u003e15.4 Choice of Models 430\u003c\/p\u003e \u003cp\u003e15.4.1 Overview 430\u003c\/p\u003e \u003cp\u003e15.4.2 Interest Rates 432\u003c\/p\u003e \u003cp\u003e15.4.3 Foreign Exchange 435\u003c\/p\u003e \u003cp\u003e15.4.4 Other Asset Classes 437\u003c\/p\u003e \u003cp\u003e15.4.5 Correlations, Proxies, and Extrapolation 437\u003c\/p\u003e \u003cp\u003e15.5 Modelling Margin (Collateral) 439\u003c\/p\u003e \u003cp\u003e15.5.1 Overview 439\u003c\/p\u003e \u003cp\u003e15.5.2 Margin Period of Risk 441\u003c\/p\u003e \u003cp\u003e15.5.3 Modelling Approach 442\u003c\/p\u003e \u003cp\u003e15.5.4 Initial Margin 445\u003c\/p\u003e \u003cp\u003e15.6 Examples 448\u003c\/p\u003e \u003cp\u003e15.6.1 Interest Rate Swap Example 448\u003c\/p\u003e \u003cp\u003e15.6.2 Trade-level Exposures 450\u003c\/p\u003e \u003cp\u003e15.6.3 Portfolio Exposures 452\u003c\/p\u003e \u003cp\u003e15.6.4 Notional Resets 456\u003c\/p\u003e \u003cp\u003e15.6.5 Impact of Variation Margin 457\u003c\/p\u003e \u003cp\u003e15.6.6 Impact of Initial Margin 460\u003c\/p\u003e \u003cp\u003e\u003cb\u003eSection 4 The xVAs\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003e16 The Starting Point and Discounting 465\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e16.1 The Starting Point 465\u003c\/p\u003e \u003cp\u003e16.1.1 Basic Valuation 465\u003c\/p\u003e \u003cp\u003e16.1.2 Perfect Collateralisation 466\u003c\/p\u003e \u003cp\u003e16.1.3 Collateral or OIS Discounting 467\u003c\/p\u003e \u003cp\u003e16.2 ColVA and Discounting 469\u003c\/p\u003e \u003cp\u003e16.2.1 Definition of ColVA 469\u003c\/p\u003e \u003cp\u003e16.2.2 Asymmetry 470\u003c\/p\u003e \u003cp\u003e16.2.3 Cheapest-to-deliver Optionality 473\u003c\/p\u003e \u003cp\u003e16.2.4 Non-cash Margin 478\u003c\/p\u003e \u003cp\u003e16.2.5 The End of ColVA 479\u003c\/p\u003e \u003cp\u003e16.3 Beyond Perfect Collateralisation – xVA 480\u003c\/p\u003e \u003cp\u003e16.3.1 Overview 480\u003c\/p\u003e \u003cp\u003e16.3.2 Definition of xVA Terms 482\u003c\/p\u003e \u003cp\u003e\u003cb\u003e17 CVA 485\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e17.1 Overview 485\u003c\/p\u003e \u003cp\u003e17.2 Credit Value Adjustment 486\u003c\/p\u003e \u003cp\u003e17.2.1 CVA Compared to Traditional Credit Pricing 486\u003c\/p\u003e \u003cp\u003e17.2.2 Direct and Path-wise CVA Formulas 487\u003c\/p\u003e \u003cp\u003e17.2.3 CVA as a Spread 492\u003c\/p\u003e \u003cp\u003e17.2.4 Special Cases 493\u003c\/p\u003e \u003cp\u003e17.2.5 Credit Spread Effects 493\u003c\/p\u003e \u003cp\u003e17.2.6 Loss Given Default 495\u003c\/p\u003e \u003cp\u003e17.3 Debt Value Adjustment 498\u003c\/p\u003e \u003cp\u003e17.3.1 Accounting Background 498\u003c\/p\u003e \u003cp\u003e17.3.2 DVA, Price, and Value 499\u003c\/p\u003e \u003cp\u003e17.3.3 Bilateral CVA Formula 500\u003c\/p\u003e \u003cp\u003e17.3.4 Close-out and Default Correlation 502\u003c\/p\u003e \u003cp\u003e17.3.5 The Use of DVA 503\u003c\/p\u003e \u003cp\u003e17.4 CVA Allocation 506\u003c\/p\u003e \u003cp\u003e17.4.1 Incremental CVA 506\u003c\/p\u003e \u003cp\u003e17.4.2 Marginal CVA 509\u003c\/p\u003e \u003cp\u003e17.5 Impact of Margin 510\u003c\/p\u003e \u003cp\u003e17.5.1 Overview 510\u003c\/p\u003e \u003cp\u003e17.5.2 Example 511\u003c\/p\u003e \u003cp\u003e17.5.3 Initial Margin 512\u003c\/p\u003e \u003cp\u003e17.5.4 CVA to CCPs 513\u003c\/p\u003e \u003cp\u003e17.6 Wrong-way Risk 514\u003c\/p\u003e \u003cp\u003e17.6.1 Overview 514\u003c\/p\u003e \u003cp\u003e17.6.2 Quantification of WWR in CVA 516\u003c\/p\u003e \u003cp\u003e17.6.3 Wrong-way Risk Models 518\u003c\/p\u003e \u003cp\u003e17.6.4 Jump Approaches 522\u003c\/p\u003e \u003cp\u003e17.6.5 Credit Derivatives 524\u003c\/p\u003e \u003cp\u003e17.6.6 Collateralisation and WWR 525\u003c\/p\u003e \u003cp\u003e17.6.7 Central Clearing and WWR 526\u003c\/p\u003e \u003cp\u003e\u003cb\u003e18 FVA 529\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e18.1 Overview 529\u003c\/p\u003e \u003cp\u003e18.2 FVA and Discounting 530\u003c\/p\u003e \u003cp\u003e18.2.1 Market Practice 530\u003c\/p\u003e \u003cp\u003e18.2.2 Source of Funding Costs and Benefits 531\u003c\/p\u003e \u003cp\u003e18.2.3 Definition of FVA 534\u003c\/p\u003e \u003cp\u003e18.2.4 Symmetric FVA Formula 535\u003c\/p\u003e \u003cp\u003e18.2.5 CVA\/DVA\/FVA Framework 539\u003c\/p\u003e \u003cp\u003e18.2.6 The FVA Debate 546\u003c\/p\u003e \u003cp\u003e18.2.7 Funding Costs and FVA Accounting 548\u003c\/p\u003e \u003cp\u003e18.3 Asymmetric FVA 551\u003c\/p\u003e \u003cp\u003e18.3.1 Overview 551\u003c\/p\u003e \u003cp\u003e18.3.2 Asymmetric FVA 552\u003c\/p\u003e \u003cp\u003e18.3.3 FVA Allocation 555\u003c\/p\u003e \u003cp\u003e18.3.4 NSFR Invariance 558\u003c\/p\u003e \u003cp\u003e18.3.5 Funding Strategies 560\u003c\/p\u003e \u003cp\u003e18.3.6 LCR Costs 561\u003c\/p\u003e \u003cp\u003e18.3.7 Funding and Wrong-way Risk 563\u003c\/p\u003e \u003cp\u003e\u003cb\u003e19 KVA 565\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e19.1 Overview 565\u003c\/p\u003e \u003cp\u003e19.2 Capital Value Adjustment (KVA) 566\u003c\/p\u003e \u003cp\u003e19.2.1 Return on Capital 566\u003c\/p\u003e \u003cp\u003e19.2.2 KVA Formula 567\u003c\/p\u003e \u003cp\u003e19.2.3 Capital Profiles 568\u003c\/p\u003e \u003cp\u003e19.2.4 KVA Example 572\u003c\/p\u003e \u003cp\u003e19.2.5 Implementation of KVA 573\u003c\/p\u003e \u003cp\u003e19.2.6 The Leverage Ratio 575\u003c\/p\u003e \u003cp\u003e19.3 Management of KVA 577\u003c\/p\u003e \u003cp\u003e19.3.1 Current Treatment of KVA by Banks 577\u003c\/p\u003e \u003cp\u003e19.3.2 Optimal KVA Management 580\u003c\/p\u003e \u003cp\u003e19.3.3 Discounting 585\u003c\/p\u003e \u003cp\u003e19.3.4 KVA Accounting 585\u003c\/p\u003e \u003cp\u003e19.4 KVA Overlaps 587\u003c\/p\u003e \u003cp\u003e19.4.1 CVA and KVA 587\u003c\/p\u003e \u003cp\u003e19.4.2 FVA and KVA 589\u003c\/p\u003e \u003cp\u003e\u003cb\u003e20 MVA 591\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e20.1 Overview 591\u003c\/p\u003e \u003cp\u003e20.2 Initial Margin Funding Costs 594\u003c\/p\u003e \u003cp\u003e20.2.1 Introduction 594\u003c\/p\u003e \u003cp\u003e20.2.2 MVA Formula 594\u003c\/p\u003e \u003cp\u003e20.2.3 EIM Term 595\u003c\/p\u003e \u003cp\u003e20.2.4 Computation Challenges 599\u003c\/p\u003e \u003cp\u003e20.2.5 Pricing and MVA Example 600\u003c\/p\u003e \u003cp\u003e20.3 MVA 602\u003c\/p\u003e \u003cp\u003e20.3.1 A Need to Charge MVA? 602\u003c\/p\u003e \u003cp\u003e20.3.2 Accounting MVA 603\u003c\/p\u003e \u003cp\u003e20.3.3 Contingent MVA 603\u003c\/p\u003e \u003cp\u003e20.3.4 CCP Basis 604\u003c\/p\u003e \u003cp\u003e20.4 Link to KVA 606\u003c\/p\u003e \u003cp\u003e20.4.1 Overview 606\u003c\/p\u003e \u003cp\u003e20.4.2 Example 607\u003c\/p\u003e \u003cp\u003e\u003cb\u003e21 Actively Managing xVA and the Role of an xVA Desk 609\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e21.1 The Role of an xVA Desk 609\u003c\/p\u003e \u003cp\u003e21.1.1 Motivation 609\u003c\/p\u003e \u003cp\u003e21.1.2 Charging Structure and Coverage 611\u003c\/p\u003e \u003cp\u003e21.1.3 Time Decay 614\u003c\/p\u003e \u003cp\u003e21.1.4 Profit Centre or Utility? 615\u003c\/p\u003e \u003cp\u003e21.1.5 Pricing 617\u003c\/p\u003e \u003cp\u003e21.2 Hedging 619\u003c\/p\u003e \u003cp\u003e21.2.1 Overview 619\u003c\/p\u003e \u003cp\u003e21.2.2 Sensitivities 621\u003c\/p\u003e \u003cp\u003e21.2.3 Gamma, Cross-gamma, Tail Risk, and Rebalancing 625\u003c\/p\u003e \u003cp\u003e21.2.4 Market Practice 627\u003c\/p\u003e \u003cp\u003e21.2.5 Jump to Default Risk 629\u003c\/p\u003e \u003cp\u003e21.2.6 Beta Hedging 630\u003c\/p\u003e \u003cp\u003e21.2.7 Risk Limits and P\u0026amp;L Explain 631\u003c\/p\u003e \u003cp\u003e21.2.8 Examples 633\u003c\/p\u003e \u003cp\u003e21.2.9 Impact on Capital 634\u003c\/p\u003e \u003cp\u003e21.2.10 Pushing xVA into Base Value 638\u003c\/p\u003e \u003cp\u003e21.3 Operation of an xVA Desk 638\u003c\/p\u003e \u003cp\u003e21.3.1 Interaction with a Treasury 638\u003c\/p\u003e \u003cp\u003e21.3.2 Capital 640\u003c\/p\u003e \u003cp\u003e21.3.3 Systems and Quantification 641\u003c\/p\u003e \u003cp\u003e21.3.4 xVA Optimisation 645\u003c\/p\u003e \u003cp\u003eGlossary 649\u003c\/p\u003e \u003cp\u003eReferences 653\u003c\/p\u003e \u003cp\u003eIndex 667\u003c\/p\u003e","brand":"John Wiley \u0026 Sons Inc","offers":[{"title":"Default Title","offer_id":49407068504407,"sku":"9781119508977","price":72.0,"currency_code":"GBP","in_stock":true}],"thumbnail_url":"\/\/cdn.shopify.com\/s\/files\/1\/0817\/1739\/5799\/files\/9781119508977.jpg?v=1730498064","url":"https:\/\/bookcurl.com\/products\/the-xva-challenge-9781119508977","provider":"Book Curl","version":"1.0","type":"link"}