By Tomasz R. Bielecki, Stéphane Crépey
Clear up the DVA/FVA Overlap factor and successfully deal with Portfolio credits danger Counterparty probability and investment: A story of 2 Puzzles explains how you can research possibility embedded in monetary transactions among the financial institution and its counterparty. The authors offer an analytical foundation for the quantitative method of dynamic valuation, mitigation, and hedging of bilateral counterparty threat on over the counter (OTC) spinoff contracts less than investment constraints. They discover credits, debt, investment, liquidity, and score valuation adjustment (CVA, DVA, FVA, LVA, and RVA) in addition to substitute rate (RC), wrong-way threat, a number of investment curves, and collateral. the 1st a part of the ebook assesses today’s monetary panorama, together with the present multi-curve truth of monetary markets. In mathematical yet model-free phrases, the second one half describes the entire easy components of the pricing and hedging framework. Taking a more effective slant, the 3rd half introduces a reduced-form modeling strategy during which the danger of default of the 2 events basically indicates up via their default intensities. The fourth half addresses counterparty chance on credits derivatives via dynamic copula types. within the 5th half, the authors current a credits migrations version as a way to account for rating-dependent credits aid annex (CSA) clauses. additionally they contact on nonlinear FVA computations in credits portfolio versions. the ultimate half covers classical instruments from stochastic research and offers a short creation to the speculation of Markov copulas. The credits drawback and ongoing ecu sovereign debt situation have proven the significance of the correct evaluate and administration of counterparty threat. This ebook makes a speciality of the interplay and attainable overlap among DVA and FVA phrases. It additionally explores the rather not easy factor of counterparty chance in portfolio credits modeling. essentially for researchers and graduate scholars in monetary arithmetic, the ebook is additionally appropriate for monetary quants, managers in banks, CVA desks, and participants of supervisory our bodies.
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Additional info for Counterparty Risk and Funding: A Tale of Two Puzzles (Chapman and Hall/CRC Financial Mathematics Series)
So we can summarize this by saying that Total bilateral Valuation adjustment is the difference between CVA and DVA as seen by the party doing the calculation. SALVA. Yes but be careful. TVA is not just the difference of CVA and DVA in a universe where only one name can default. In computing DVA and CVA in the difference, you 5 As it is frequent in the counterparty risk literature, the same terminology is used by different authors and users with different meaning. So is the case with TVA. A Galilean Dialogue on Counterparty Risk, CVA, DVA, Multiple Curves, Collateral and Funding 25 need to account for both defaults in both terms.
In that paper bilateral risk is introduced in general and then analyzed for CDS. In Brigo, Pallavicini, and Papatheodorou (2011), Brigo, Capponi, and Pallavicini (2014) and Brigo, Capponi, Pallavicini, and Papatheodorou (2011) other aspects of bilateral risk are carefully examined, also in relationship with wrong-way risk, collateral and extreme contagion and gap risk. Those works analyze what happens when default happens between margining dates and a relevant mark to market change for worse has occurred.
Clearly, under two different probability measures the same random variable will usually have two different expected values, variances, percentiles, etc. The probability P, the historical or physical probability measure (also known as real world measure), is the probability measure we use to do historical estimation of financial variables, econometrics, historical volatility calculations, historical correlations, autocorrelations, maximum likelihood estimation, etc. As we compute VaR, for example, when we simulate the financial variables up to the risk horizon, we do it under P.
Counterparty Risk and Funding: A Tale of Two Puzzles (Chapman and Hall/CRC Financial Mathematics Series) by Tomasz R. Bielecki, Stéphane Crépey