By Tomasz R. Bielecki, Stéphane Crépey
Resolve the DVA/FVA Overlap factor and successfully deal with Portfolio credits chance Counterparty danger and investment: A story of 2 Puzzles explains find out how to learn possibility embedded in monetary transactions among the financial institution and its counterparty. The authors supply an analytical foundation for the quantitative method of dynamic valuation, mitigation, and hedging of bilateral counterparty hazard on over the counter (OTC) spinoff contracts lower than investment constraints. They discover credits, debt, investment, liquidity, and ranking valuation adjustment (CVA, DVA, FVA, LVA, and RVA) in addition to alternative price (RC), wrong-way chance, a number of investment curves, and collateral. the 1st a part of the publication 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 all of the simple components of the pricing and hedging framework. Taking a simpler slant, the 3rd half introduces a reduced-form modeling technique during which the danger of default of the 2 events simply indicates up via their default intensities. The fourth half addresses counterparty hazard on credits derivatives via dynamic copula versions. within the 5th half, the authors current a credits migrations version in an effort 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 quick creation to the speculation of Markov copulas. The credits quandary and ongoing eu sovereign debt trouble have proven the significance of the correct evaluation and administration of counterparty possibility. This e-book makes a speciality of the interplay and attainable overlap among DVA and FVA phrases. It additionally explores the fairly not easy factor of counterparty chance in portfolio credits modeling. basically for researchers and graduate scholars in monetary arithmetic, the booklet can also be appropriate for monetary quants, managers in banks, CVA desks, and participants of supervisory our bodies.
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Extra info for Counterparty Risk and Funding: A Tale of Two Puzzles (Chapman and Hall/CRC Financial Mathematics Series)
Whistles] I hadn’t thought about this. But it does make sense. . SALVA. One could then decide to use replacement closeout. However, the replacement closeout has shortcomings opposite to those of the risk-free closeout. The risk-free closeout will be preferred by the creditors. The more money debtors pay, the higher the recovery will be. The replacement closeout, while protecting debtors, can in some situations worryingly penalize the creditors by abating the recovery. This for example happens when the defaulted entity is a company with high systemic impact, so that when it defaults the credit spreads of its counterparties are expected to jump high.
For some small/medium and sometimes even large counterparties it is even difficult to imply default probabilities, not to mention expected recoveries. From what I understand [looks at Salva] Q default probabilities can be deduced from credit default swap or corporate bond counterparty data. But how many small and medium enterprises have no reliable CDS or Bond quotes? Many counterparties do not have a liquid CDS or even an issued bond that are traded. What if the counterparty is the port of Mouseton?
First, counterparty exposure at any future time is the larger between zero and the market value of the portfolio at that time. Current exposure (CE) is the current value (say now, at time 0) of the exposure to a counterparty, so it is the current value of the portfolio if positive, and zero otherwise. It is the expectation under the pricing measure Q of future cash flows, each discounted back to time 0 (now) and added up, if positive and zero otherwise. [loosens tie] Potential future exposure (PFE) at a given time is the maximum of exposure at that time under a high degree of statistical confidence.
Counterparty Risk and Funding: A Tale of Two Puzzles (Chapman and Hall/CRC Financial Mathematics Series) by Tomasz R. Bielecki, Stéphane Crépey