Related papers: Funded Bilateral Valuation Adjustment
Credit Valuation Adjustment is a balance sheet item which is nowadays subject to active risk management by specialized traders. However, one of the most important risk factors, which is the vector of default intensities of the counterparty,…
The research presented in this work is motivated by some recent papers regarding hedging and valuation of financial securities subject to funding costs, collateralization and counterparty credit risk. Our goal is to provide a sound…
During the COVID-19 pandemic, many institutions have announced that their counterparties are struggling to fulfill contracts.Therefore, it is necessary to consider the counterparty default risk when pricing options. After the 2008 financial…
We take the holistic approach of computing an OTC claim value that incorporates credit and funding liquidity risks and their interplays, instead of forcing individual price adjustments: CVA, DVA, FVA, KVA. The resulting nonlinear…
This paper studies a valuation framework for financial contracts subject to reference and counterparty default risks with collateralization requirement. We propose a fixed point approach to analyze the mark-to-market contract value with…
Initial margin requirements are becoming an increasingly common feature of derivative markets. However, while the valuation of derivatives under collateralisation (Piterbarg 2010, Piterbarg2012), under counterparty risk with unsecured…
The valuation of over-the-counter derivatives is subject to a series of valuation adjustments known as xVA, which pose additional risks for financial institutions. Associated risk measures, such as the value-at-risk of an underlying…
In this paper we present a rigorously motivated pricing equation for derivatives, including general cash collateralization schemes, which is consistent with quoted market bond prices. Traditionally, there have been differences in how…
The collateral choice option gives the collateral posting party the opportunity to switch between different collateral currencies which is well-known to impact the asset price. Quantification of the option's value is of practical importance…
The authors examine the concept of probability of default for asset-backed loans. In contrast to unsecured loans it is shown that probability of default can be defined as either a measure of the likelihood of the borrower failing to make…
A new methodology for incorporating LGD correlation effects into the Basel II risk weight functions is introduced. This methodology is based on modelling of LGD and default event with a single loss variable. The resulting formulas for…
The two main issues for managing wrong way risk (WWR) for the credit valuation adjustment (CVA, i.e. WW-CVA) are calibration and hedging. Hence we start from a novel model-free worst-case approach based on static hedging of counterparty…
This article prices OTC derivatives with either an exogenously determined initial margin profile or endogenously approximated initial margin. In the former case, margin valuation adjustment (MVA) is defined as the liability-side discounted…
The collateral choice option allows a collateral-posting party the opportunity to change the type of security in which the collateral is deposited. Due to non-zero collateral basis spreads, this optionality significantly impacts asset…
This paper presents a convenient framework for modeling default process and pricing derivative securities involving credit risk. The framework provides an integrated view of credit valuation adjustment by linking distance-to-default,…
In this paper we present a novel approach for firm default probability estimation. The methodology is based on multivariate contingent claim analysis and pair copula constructions. For each considered firm, balance sheet data are used to…
The dynamic hedging theory only makes sense in the setup of one given model, whereas the practice of dynamic hedging is just the opposite, with models fleeing after the data through daily recalibration. This is quite of a quantitative…
Funding is a cost to trading desks that they see as an input. Current FVA-related literature reflects this by also taking funding costs as an input, usually constant, and always risk-neutral. However, this funding curve is the output from a…
The X-valuation adjustment (XVA) problem, which is a recent topic in mathematical finance, is considered and analyzed. First, the basic properties of backward stochastic differential equations (BSDEs) with a random horizon in a…
Basel III introduces new capital charges for CVA. These charges, and the Basel 2.5 default capital charge can be mitigated by CDS. Therefore, to price in the capital relief that CDS contracts provide, we introduce a CDS pricing model with…