Related papers: Handling model risk with XVAs
Although climate and nature related scenario analysis is increasingly important in finance, operational implementations remain limited for translating long horizon environmental scenarios into counterparty credit risk measures used in…
A novel dynamical model for the study of operational risk in banks and suitable for the calculation of the Value at Risk (VaR) is proposed. The equation of motion takes into account the interactions among different bank's processes, the…
This paper investigates calculations of robust XVA, in particular, credit valuation adjustment (CVA) and funding valuation adjustment (FVA) for over-the-counter derivatives under distributional uncertainty using Wasserstein distance as the…
We consider the problem of computing the Value Adjustment of European contingent claims when default of either party is considered, possibly including also funding and collateralization requirements. As shown in Brigo et al. (\cite{BLPS},…
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,…
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…
We study a notion of good-deal hedging, that corresponds to good-deal valuation for generalized good-deal constraints. Under model uncertainty about the market prices of risk of hedging assets, a robust approach leads to a reduction or even…
We investigate model risk and distributionally robust optimization (DRO) under marginal and martingale constraints. Building on our previous work, we address the previously open case of static hedging with second-period maturity vanilla…
We propose a method for extending a given asset pricing formula to account for two additional sources of risk: the risk associated with future changes in market--calibrated parameters and the remaining risk associated with idiosyncratic…
Globally operating enterprises selling large and complex products and services often have to deal with situations where variability models are locally developed to take into account the requirements of local markets. For example, cars sold…
In this paper we show how risk-averse reinforcement learning can be used to hedge options. We apply a state-of-the-art risk-averse algorithm: Trust Region Volatility Optimization (TRVO) to a vanilla option hedging environment, considering…
In this paper, we compare static and dynamic (reduced form) approaches for modeling wrong-way risk in the context of CVA. Although all these approaches potentially suffer from arbitrage problems, they are popular (respectively) in industry…
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…
We tackle the calibration of the so-called Stochastic-Local Volatility (SLV) model. This is the class of financial models that combines the local and stochastic volatility features and has been subject of the attention by many researchers…
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…
Local Volatility (LV) is a powerful tool for market modeling, enabling the generation of arbitrage-free scenarios calibrated to all European options. To implement LV, we need to interpolate and extrapolate option prices. This approach is…
Traditional approaches to estimating beta in finance often involve rigid assumptions and fail to adequately capture beta dynamics, limiting their effectiveness in use cases like hedging. To address these limitations, we have developed a…
This paper proposes a market consistent valuation framework for variable annuities with guaranteed minimum accumulation benefit, death benefit and surrender benefit features. The setup is based on a hybrid model for the financial market and…
We present a reactive beta model that includes the leverage effect to allow hedge fund managers to target a near-zero beta for market neutral strategies. For this purpose, we derive a metric of correlation with leverage effect to identify…
We construct a binomial model for a guaranteed minimum withdrawal benefit (GMWB) rider to a variable annuity (VA) under optimal policyholder behaviour. The binomial model results in explicitly formulated perfect hedging strategies funded…