Thorough, accessible coverage of the key issues in
XVA

XVA - Credit, Funding and Capital Valuation
Adjustments provides specialists and non-specialists alike
with an up-to-date and comprehensive treatment of Credit, Debit,
Funding, Capital and Margin Valuation Adjustment (CVA, DVA, FVA,
KVA and MVA), including modelling frameworks as well as broader IT
engineering challenges. Written by an industry expert, this book
navigates you through the complexities of XVA, discussing in detail
the very latest developments in valuation adjustments including the
impact of regulatory capital and margin requirements arising from
CCPs and bilateral initial margin.

The book presents a unified approach to modelling valuation
adjustments including credit risk, funding and regulatory effects.
The practical implementation of XVA models using Monte Carlo
techniques is also central to the book. You'll also find thorough
coverage of how XVA sensitivities can be accurately measured, the
technological challenges presented by XVA, the use of grid
computing on CPU and GPU platforms, the management of data, and how
the regulatory framework introduced under Basel III presents
massive implications for the finance industry.

* Explores how XVA models have developed in the aftermath of the
credit crisis

* The only text to focus on the XVA adjustments rather than the
broader topic of counterparty risk.

* Covers regulatory change since the credit crisis including
Basel III and the impact regulation has had on the pricing of
derivatives.

* Covers the very latest valuation adjustments, KVA and MVA.

* The author is a regular speaker and trainer at industry events,
including WBS training, Marcus Evans, ICBI, Infoline and RISK

If you're a quantitative analyst, trader, banking manager, risk
manager, finance and audit professional, academic or student
looking to expand your knowledge of XVA, this book has you
covered.

ANDREW GREEN heads CVA/FVA Quantitative Research at Lloyds Banking Group. He leads a team of quantitative analysts and developers who are responsible for the design and implementation of models for derivative valuation adjustments. Andrew and his team also work extensively on the implication of regulatory change on derivatives. Andrew previously headed CVA Quantitative Research at Barclays Capital and during his career, has also worked on models for fixed income and equity derivative products as well as ALM. High performance computing is a central element of XVA model implementation and Andrew has extensive experience of the practical implementation of large scale Monte Carlo simulation models in IT systems. Andrew is a regular conference speaker and has co-authored a number of papers on various topics in XVA. He has a DPhil in Theoretical Physics and a BA in Physics from Oxford University, and Part III of the Mathematics Tripos from Cambridge University.

Thorough, accessible coverage of the key issues in XVA

XVA Credit, Funding and Capital Valuation Adjustments provides specialists and non-specialists alike with an up-to-date and comprehensive treatment of Credit, Debit, Funding, Capital and Margin Valuation Adjustment (CVA, DVA, FVA, KVA and MVA), including modelling frameworks as well as broader IT engineering challenges. Written by an industry expert, this book navigates you through the complexities of XVA, discussing in detail the very latest developments in valuation adjustments including the impact of regulatory capital and margin requirements arising from CCPs and bilateral initial margin.

The book presents a unified approach to modelling valuation adjustments including credit risk, funding and regulatory effects. The practical implementation of XVA models using Monte Carlo techniques is also central to the book. You'll also find thorough coverage of how XVA sensitivities can be accurately measured, the technological challenges presented by XVA, the use of grid computing on CPU and GPU platforms, the management of data, and how the regulatory framework introduced under Basel III presents massive implications for the finance industry.

• Explores how XVA models have developed in the aftermath of the credit crisis
• The only text to focus on the XVA adjustments rather than the broader topic of counterparty risk.
• Covers regulatory change since the credit crisis including Basel III and the impact regulation has had on the pricing of derivatives.
• Covers the very latest valuation adjustments, KVA and MVA.
• The author is a regular speaker and trainer at industry events, including WBS training, Marcus Evans, ICBI, Infoline and RISK

If you're a quantitative analyst, trader, banking manager, risk manager, finance and audit professional, academic or student looking to expand your knowledge of XVA, this book has you covered.

List of Tables xvii

List of Figures xxi

Acknowledgements xxv

CHAPTER 1 Introduction: The Valuation of Derivative Portfolios 1

1.1 What this book is about 1

1.2 Prices and Values 4

1.2.1 Before the Fall... 4

1.2.2 The Post-Crisis World... 5

1.3 Trade Economics in Derivative Pricing 6

1.3.1 The Components of a Price 6

1.3.2 Risk-Neutral Valuation 8

1.3.3 Hedging and Management Costs 11

1.3.4 Credit Risk: CVA/DVA 11

1.3.5 FVA 13

1.3.6 Regulatory Capital and KVA 14

1.4 Post-Crisis Derivative Valuation or How I Learned to Stop Worrying and Love FVA 16

1.4.1 The FVA Debate and the Assault on Black-Scholes-Merton 16

1.4.2 Different Values for Different Purposes 19

1.4.3 Summary: The Valuation Paradigm Shift 21

1.5 Reading this Book 21

PART ONE CVA and DVA: Counterparty Credit Risk and Credit Valuation Adjustment

CHAPTER 2 Introducing Counterparty Risk 25

2.1 Defining Counterparty Risk 25

2.1.1 Wrong-way and Right-way Risk 27

2.2 CVA and DVA: Credit Valuation Adjustment and Debit Valuation Adjustment Defined 27

2.3 The Default Process 28

2.3.1 Example Default: The Collapse of Lehman Brothers 30

2.4 Credit Risk Mitigants 30

2.4.1 Netting 30

2.4.2 Collateral/Security 31

2.4.3 Central Clearing and Margin 34

2.4.4 Capital 35

2.4.5 Break Clauses 35

2.4.6 Buying Protection 37

CHAPTER 3 CVA and DVA: Credit and Debit Valuation Adjustment Models 39

3.1 Introduction 39

3.1.1 Close-out and CVA 40

3.2 Unilateral CVA Model 42

3.2.1 Unilateral CVA by Expectation 42

3.2.2 Unilateral CVA by Replication 43

3.3 Bilateral CVA Model: CVA and DVA 48

3.3.1 Bilateral CVA by Expectation 48

3.3.2 Bilateral CVA by Replication 50

3.3.3 DVA and Controversy 53

3.4 Modelling Dependence between Counterparties 55

3.4.1 Gaussian Copula Model 55

3.4.2 Other Copula Models 56

3.5 Components of a CVA Calculation Engine 57

3.5.1 Monte Carlo Simulation 57

3.5.2 Trade Valuation and Approximations 57

3.5.3 Expected Exposure Calculation 59

3.5.4 Credit Integration 59

3.6 Counterparty Level CVA vs. Trade Level CVA 59

3.6.1 Incremental CVA 60

3.6.2 Allocated CVA 60

3.7 Recovery Rate/Loss-Given-Default Assumptions 63

CHAPTER 4 CDS and Default Probabilities 65

4.1 Survival Probabilities and CVA 65

4.2 Historical versus Implied Survival Probabilities 66

4.3 Credit Default Swap Valuation 67

4.3.1 Credit Default Swaps 67

4.3.2 Premium Leg 69

4.3.3 Protection Leg 71

4.3.4 CDS Value and Breakeven Sp…