OSAMU TSUCHIYA
A Practical Approach to XVA
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:ForewordPrefaceAbout the AuthorList of FiguresList of TablesIntroductionFundamentals:Underpinnings of Traditional Derivatives Pricing and Implications of Current EnvironmentPricing Adjustments:CVA and its Relation to Traditional Bond PricingDVA and FVA — Price and Value for Accountants, Regulators and OthersTheoretical Framework behind FVA and its ComputationIngredients of the Modern Yield Curve and Overlaps with XVAMargin Valuation Adjustment (MVA)KVA, and Other Adjustments and CostsComputing XVA in Practice:Typical Balance Sheet and Trade Relations of Banks and Implication for XVAFramework for Computing XVACalculation of KVA and MVAManaging XVA:CVA Hedging, Default Arrangements and Implications for XVA ModelingManaging XVA in PracticeAppendicesSample AppendixA Brief Outline of Regulatory Capital Charges for Financial InstitutionsConclusionReferencesIndexReadership: 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 XVAThe book presents the calculation methodology of XVA as concisely as possibleThe book analyzes the features of XVA in the practice of the derivative trading business
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ISBN: 9789813272750
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