Related papers: Robust XVA
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…
We develop a finite horizon continuous time market model, where risk averse investors maximize utility from terminal wealth by dynamically investing in a risk-free money market account, a stock written on a default-free dividend process,…
The inclusion of DVA in the fair-value of derivative transactions has now become standard accounting practice in most parts of the world. Furthermore, some sophisticated banks are including an FVA (Funding Valuation Adjustment), but since…
This paper generalizes the framework for arbitrage-free valuation of bilateral counterparty risk to the case where collateral is included, with possible re-hypotecation. We analyze how the payout of claims is modified when collateral…
Bank behaviour is important for pricing XVA because it links different counterparties and thus breaks the usual XVA pricing assumption of counterparty independence. Consider a typical case of a bank hedging a client trade via a CCP. On…
In this work we want to provide a general principle to evaluate the CVA (Credit Value Adjustment) for a vulnerable option, that is an option subject to some default event, concerning the solvability of the issuer. CVA is needed to evaluate…
The replacement closeout convention has drawn more and more attention since the 2008 financial crisis. Compared with the conventional risk-free closeout, the replacement closeout convention incorporates the creditworthiness of the…
We introduce a dynamic credit portfolio framework where optimal investment strategies are robust against misspecifications of the reference credit model. The risk-averse investor models his fear of credit risk misspecification by…
This paper develops an XVA (costs) analysis of centrally cleared trading, parallel to the one that has been developed in the last years for bilateral transactions. We introduce a dynamic framework that incorporates the sequence of…
The importance of counterparty credit risk to the derivative contracts was demonstrated consistently throughout the financial crisis of 2008. Accurate valuation of Credit value adjustment (CVA) is essential to reflect the economic values of…
We compare two different bilateral counterparty valuation adjustment (BVA) formulas. The first formula is an approximation and is based on subtracting the two unilateral Credit Valuation Adjustment (CVA)'s formulas as seen from the two…
Reinsurance counterparty credit risk (RCCR) is the risk of a loss arising from the fact that a reinsurance company is unable to fulfill her contractual obligations towards the ceding insurer. RCCR is an important risk category for insurance…
We price and replicate a variety of claims written on the log price $X$ and quadratic variation $[X]$ of a risky asset, modeled as a positive semimartingale, subject to stochastic volatility and jumps. The pricing and hedging formulas do…
This study contributes to understanding Valuation Adjustments (xVA) by focussing on the dynamic hedging of Credit Valuation Adjustment (CVA), corresponding Profit & Loss (P&L) and the P&L explain. This is done in a Monte Carlo simulation…
A variance swap is a derivative with a path-dependent payoff which allows investors to take positions on the future variability of an asset. In the idealised setting of a continuously monitored variance swap written on an asset with…
In the paper we study dynamics of the arbitrage prices of credit default swaps within a hazard process model of credit risk. We derive these dynamics without postulating that the immersion property is satisfied between some relevant…
The stability of the financial system is associated with systemic risk factors such as the concurrent default of numerous small obligors. Hence it is of utmost importance to study the mutual dependence of losses for different creditors in…
This paper develops a model-free framework for static fixed-income pricing and the replication of liability cash flows. We show that the absence of static arbitrage across a universe of fixed-income instruments is equivalent to the…
This paper investigates calculations of robust funding valuation adjustment (FVA) for over the counter (OTC) derivatives under distributional uncertainty using Wasserstein distance as the ambiguity measure. Wrong way funding risk can be…
The main result of this paper is a collateralized counterparty valuation adjusted pricing equation, which allows to price a deal while taking into account credit and debit valuation adjustments (CVA, DVA) along with margining and funding…