Related papers: Relevance of Wrong-Way Risk in Funding Valuation A…
Wrong-Way Risk (WWR) is an important component in Funding Valuation Adjustment (FVA) modelling. Yet, the standard assumption is independence between market risks and the counterparty defaults and funding costs. This typical industrial…
Wrong-way risk in counterparty and funding exposures is most dramatic in the situations of systemic crises and tails events. A consistent model of wrong-way risk (WWR) is developed here with the probability-weighted addition of tail events…
A key driver of Credit Value Adjustment (CVA) is the possible dependency between exposure and counterparty credit risk, known as Wrong-Way Risk (WWR). At this time, addressing WWR in a both sound and tractable way remains challenging:…
General wrong way risk (WWR) estimation is necessary for regulatory CVA capital and useful for pricing CVA and FVA. We introduce a model independent method for calculating WWR and update the definition of WWR to deal with the lack of…
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…
Quantification of risk positions under model uncertainty is of crucial importance from both viewpoints of external regulation and internal management. The concept of model uncertainty, sometimes also referred to as model ambiguity. Although…
Predicting future values at risk (fVaR) is an important problem in finance. They arise in the modelling of future initial margin requirements for counterparty credit risk and future market risk VaR. One is also interested in derived…
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…
In this paper we revisit Burnett (2021) \& Burnett and Williams (2021)'s notion of hedging valuation adjustment (HVA), originally intended to deal with dynamic hedging frictions such as transaction costs, in the direction of model risk. The…
In the aftermath of the 2007 global financial crisis, banks started reflecting into derivative pricing the cost of capital and collateral funding through XVA metrics. Here XVA is a catch-all acronym whereby X is replaced by a letter such as…
Credit Valuation Adjustment captures the difference in the value of derivative contracts when the counterparty default probability is taken into account. However, in the context of a network of contracts, the default probability of a direct…
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…
This article presents a generic model for pricing financial derivatives subject to counterparty credit risk. Both unilateral and bilateral types of credit risks are considered. Our study shows that credit risk should be modeled as American…
A positive correlation between exposure and counterparty credit risk gives rise to the so-called Wrong-Way Risk (WWR). Even after a decade of the financial crisis, addressing WWR in both sound and tractable ways remains challenging.…
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…
We show how the cost of funding the collateral in a particular set up can be equal to the Bilateral Valuation Adjustment with the "funded" probability of default, leading to the definition of a Funded Bilateral Valuation Adjustment (FBVA).…
The purpose of this paper is introducing rigorous methods and formulas for bilateral counterparty risk credit valuation adjustments (CVA's) on interest-rate portfolios. In doing so, we summarize the general arbitrage-free valuation…
We consider the problem of computing the Credit Value Adjustment ({CVA}) of a European option in presence of the Wrong Way Risk ({WWR}) in a default intensity setting. Namely we model the asset price evolution as solution to a linear…
Credit Value Adjustment (CVA) is the difference between the value of the default-free and credit-risky derivative portfolio, which can be regarded as the cost of the credit hedge. Default probabilities are therefore needed, as input…
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…