Xva Challenge - Counterparty Risk, Funding, Collateral, Capital and Initial Margin

A thoroughly updated and expanded edition of the xVA challenge
 
The period since the global financial crisis has seen a major re-appraisal of derivatives valuation, generally expressed in the form of valuation adjustments ('xVAs'). The quantification of xVA is now seen as fundamental to derivatives pricing and valuation. The xVA topic has been complicated and further broadened by accounting standards and regulation. All users of derivatives need to have a good understanding of the implications of xVA. The pricing and valuation of the different xVA terms has become a much studied topic and many aspects are in constant debate both in industry and academia.
* Discussing counterparty credit risk in detail, including the many risk mitigants, and how this leads to the different xVA terms
* Explains why banks have undertaken a dramatic reappraisal of the assumptions they make when pricing, valuing and managing derivatives
* Covers what the industry generally means by xVA and how it is used by banks, financial institutions and end-users of derivatives
* Explains all of the underlying regulatory capital (e.g. SA-CCR, SA-CVA) and liquidity requirements (NSFR and LCR) and their impact on xVA
* Underscores why banks have realised the significant impact that funding costs, collateral effects and capital charges have on valuation
* Explains how the evolution of accounting standards to cover CVA, DVA, FVA and potentially other valuation adjustments
* Explains all of the valuation adjustments - CVA, DVA, FVA, ColVA, MVA and KVA - in detail and how they fit together
* Covers quantification of xVA terms by discussing modelling and implementation aspects.
 
Taking into account the nature of the underlying market dynamics and new regulatory environment, this book brings readers up to speed on the latest developments on the topic.

Sommario

List of Spreadsheets xix
 
List of Appendices xxi
 
Acknowledgements xxiii
 
About the Author xxv
 
Section 1 Basics
 
1 Introduction 3
 
2 Derivatives 5
 
2.1 Introduction 5
 
2.2 The Derivatives Market 6
 
2.2.1 Exchange-traded and OTC Derivatives 6
 
2.2.2 Clearing 8
 
2.2.3 Market Overview 9
 
2.2.4 Market Participants and Collateralisation 11
 
2.2.5 Banks and End Users 14
 
2.2.6 ISDA Documentation 16
 
2.2.7 Credit Derivatives 17
 
2.2.8 Financial Weapons of Mass Destruction 18
 
2.2.9 The Lehman Brothers Bankruptcy 19
 
2.3 Derivative Risks 20
 
2.3.1 Market Risk 21
 
2.3.2 Credit Risk 21
 
2.3.3 Operational and Legal Risk 22
 
2.3.4 Liquidity Risk 22
 
2.3.5 Integration of Risk Types 23
 
2.3.6 Counterparty Risk 23
 
2.4 Systemic Risk of Derivatives 24
 
2.4.1 Overview 24
 
2.4.2 Special Purpose Vehicles 24
 
2.4.3 Derivatives Product Companies 25
 
2.4.4 Monolines and CDPCs 26
 
2.5 The Global Financial Crisis and Central Clearing of OTC Derivatives 28
 
2.5.1 OTC Derivatives and the Crisis 28
 
2.5.2 OTC Derivatives Clearing 29
 
2.5.3 CCPs in the Global Financial Crisis 31
 
2.5.4 The Clearing Mandate 32
 
2.5.5 Bilateral Margin Requirements 33
 
2.5.6 CCPs in Context 34
 
2.6 Derivatives Risk Modelling 36
 
2.6.1 Value-at-risk 36
 
2.6.2 Models 38
 
2.6.3 Correlation and Dependency 39
 
3 Counterparty Risk and Beyond 41
 
3.1 Counterparty Risk 41
 
3.1.1 Counterparty Risk Versus Lending Risk 41
 
3.1.2 Settlement, Pre-settlement, and Margin Period of Risk 42
 
3.1.3 Mitigating Counterparty Risk 45
 
3.1.4 Product Type 46
 
3.1.5 Credit Limits 48
 
3.1.6 Credit Value Adjustment 50
 
3.1.7 What Does CVA Represent? 51
 
3.1.8 Hedging Counterparty Risk and the CVA Desk 52
 
3.2 Beyond Counterparty Risk 54
 
3.2.1 Overview 54
 
3.2.2 Economic Costs of a Derivative 54
 
3.2.3 xVA Terms 55
 
3.3 Components of xVA 57
 
3.3.1 Overview 57
 
3.3.2 Valuation and Mark-to-market 57
 
3.3.3 Replacement Cost and Credit Exposure 58
 
3.3.4 Default Probability, Credit Migration, and Credit Spreads 59
 
3.3.5 Recovery and Loss Given Default 60
 
3.3.6 Funding, Collateral, and Capital Costs 61
 
4 Regulation 63
 
4.1 Regulation and the Global Financial Crisis 63
 
4.2 Capital Requirements 64
 
4.2.1 Overview 64
 
4.2.2 Capital Ratios 65
 
4.2.3 Risk Type 67
 
4.2.4 Market Risk Capital 68
 
4.2.5 CVA Capital 69
 
4.2.6 CCR Capital 70
 
4.2.7 Leverage Ratio 70
 
4.2.8 Capital Floors 71
 
4.2.9 Large Exposure Framework 72
 
4.2.10 Bank Stress Tests 73
 
4.2.11 Prudent Valuation 73
 
4.3 Liquidity 73
 
4.3.1 Overview 73
 
4.3.2 High-quality Liquid Assets 74
 
4.3.3 Liquidity Coverage Ratio 75
 
4.3.4 Net Stable Funding Ratio 76
 
4.4 Clearing and Margining 77
 
4.4.1 Central Clearing 77
 
4.4.2 Bilateral Margin Requirements 81
 
4.4.3 Exemptions 82
 
4.4.4 CCP Capital Requirements 84
 
5 What is xVA? 85
 
5.1 Overview 85
 
5.2 Analysis of xVA 86
 
5.2.1 Definition 86
 
5.2.2 Components 86
 
5.2.3 Why Valuation Adjustments? 87
 
5.2.4 Mark-to-mar

Info autore

JON GREGORY, PHD, is an independent expert specialising in counterparty risk and related aspects. He has worked on many aspects of credit risk in his career, being previously with Barclays Capital, BNP Paribas and Citigroup. He is a senior advisor for Solum Financial Derivatives Advisory and is a faculty member for the Certificate of Quantitative Finance (CQF). Jon has a PhD from Cambridge University.

Dettagli sul prodotto

• Autori: Jon Gregory, Jon (Independent Trainer and Consultant) Gregory, Gregory Jon
• Editore: Wiley, John and Sons Ltd
• Lingue: Inglese
• Formato: Copertina rigida
• Pubblicazione: 20.05.2020
• EAN: 9781119508977
• ISBN: 978-1-119-50897-7
• Pagine: 704
• Serie: Wiley Finance; Wiley Finance Editions
• Categorie: Scienze sociali, diritto, economia > Economia > Economia aziendale; Finanzwesen, Finance & Investments, Finanz- u. Anlagewesen, Spezialthemen Finanz- u. Anlagewesen, Finance & Investments Special Topics