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A Practical Approach to XVA (eBook)

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  • 67,446 Words
  • 340 Pages

The 2008 financial crisis shook the financial derivatives market to its core, revealing a failure to fully price the cost of doing business then. As a response to this, and to cope with regulatory demands for massively increased capital and other measures with funding cost, the pre-2008 concept of Credit Valuation Adjustment (CVA) has evolved into the far more complex hybrid Cross Valuation Adjustment (XVA).

This book presents a clear and concise framework and provides key considerations for the computation of myriad adjustments to the price of financial derivatives, to fully reflect costs. XVA has been of great interest recently due to heavy funding costs (FVA), initial margin (MVA) and capital requirements (KVA) required to sustain a derivatives business since 2008, in addition to the traditional concepts of cost from counterparty default or credit deterioration (CVA), and its mirror image — the cost of one own's default (DVA).

The book takes a practitioner's perspective on the above concepts, and then provides a framework to implement such adjustments in practice. Models are presented too, taking note of what is computationally feasible in light of portfolios typical of investment banks, and the different instruments associated with these portfolios.

Contents:
  • Foreword
  • Preface
  • About the Author
  • List of Figures
  • List of Tables
  • Introduction
  • Fundamentals:
    • Underpinnings of Traditional Derivatives Pricing and Implications of Current Environment
  • Pricing Adjustments:
    • CVA and its Relation to Traditional Bond Pricing
    • DVA and FVA — Price and Value for Accountants, Regulators and Others
    • Theoretical Framework behind FVA and its Computation
    • Ingredients of the Modern Yield Curve and Overlaps with XVA
    • Margin Valuation Adjustment (MVA)
    • KVA, and Other Adjustments and Costs
  • Computing XVA in Practice:
    • Typical Balance Sheet and Trade Relations of Banks and Implication for XVA
    • Framework for Computing XVA
    • Calculation of KVA and MVA
  • Managing XVA:
    • CVA Hedging, Default Arrangements and Implications for XVA Modeling
    • Managing XVA in Practice
  • Appendices
    • Sample Appendix
    • A Brief Outline of Regulatory Capital Charges for Financial Institutions
  • Conclusion
  • References
  • Index

Readership: Professionals in the financial derivatives industry, as well as graduate students of quantitative finance.XVA;CVA;Valuation Adjustments;Counterparty Credit Risk;CCR;KVA;Regulatory Capital0Key Features:
  • The book presents overview of the fundamental principles of XVA
  • The book presents the calculation methodology of XVA as concisely as possible
  • The book analyzes the features of XVA in the practice of the derivative trading business

The 2008 financial crisis shook the financial derivatives market to its core, revealing a failure to fully price the cost of doing business then. As a response to this, and to cope with regulatory demands for massively increased capital and other measures with funding cost, the pre-2008 concept of Credit Valuation Adjustment (CVA) has evolved into the far more complex hybrid Cross Valuation Adjustment (XVA).

This book presents a clear and concise framework and provides key considerations for the computation of myriad adjustments to the price of financial derivatives, to fully reflect costs. XVA has been of great interest recently due to heavy funding costs (FVA), initial margin (MVA) and capital requirements (KVA) required to sustain a derivatives business since 2008, in addition to the traditional concepts of cost from counterparty default or credit deterioration (CVA), and its mirror image — the cost of one own's default (DVA).

The book takes a practitioner's perspective on the above concepts, and then provides a framework to implement such adjustments in practice. Models are presented too, taking note of what is computationally feasible in light of portfolios typical of investment banks, and the different instruments associated with these portfolios.

Contents:
  • Foreword
  • Preface
  • About the Author
  • List of Figures
  • List of Tables
  • Introduction
  • Fundamentals:
    • Underpinnings of Traditional Derivatives Pricing and Implications of Current Environment
  • Pricing Adjustments:
    • CVA and its Relation to Traditional Bond Pricing
    • DVA and FVA — Price and Value for Accountants, Regulators and Others
    • Theoretical Framework behind FVA and its Computation
    • Ingredients of the Modern Yield Curve and Overlaps with XVA
    • Margin Valuation Adjustment (MVA)
    • KVA, and Other Adjustments and Costs
  • Computing XVA in Practice:
    • Typical Balance Sheet and Trade Relations of Banks and Implication for XVA
    • Framework for Computing XVA
    • Calculation of KVA and MVA
  • Managing XVA:
    • CVA Hedging, Default Arrangements and Implications for XVA Modeling
    • Managing XVA in Practice
  • Appendices
    • Sample Appendix
    • A Brief Outline of Regulatory Capital Charges for Financial Institutions
  • Conclusion
  • References
  • Index

Readership: Professionals in the financial derivatives industry, as well as graduate students of quantitative finance.XVA;CVA;Valuation Adjustments;Counterparty Credit Risk;CCR;KVA;Regulatory Capital0Key Features:
  • The book presents overview of the fundamental principles of XVA
  • The book presents the calculation methodology of XVA as concisely as possible
  • The book analyzes the features of XVA in the practice of the derivative trading business


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by osamu tsuchiya

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