Correlation Risk Modelling and Management (2nd Edition)
First published:
ISBN: 978-1-78272-405-6
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Basel III and XVAs
Basel III and XVAs
Introduction
Correlation Basics: Definitions, Applications and Terminology
Empirical Properties of Correlation: How do Correlations Behave in the Real World?
The Pearson Correlation Model – Work of the Devil?
Cointegration – A Superior Concept to Correlation?
Financial Correlation Modelling – Bottom-up Approaches
Valuing CDOs with the Gaussian Copula – What Went Wrong?
The One-Factor Gaussian Copula Model – Too Simplistic?
Financial Correlation Models – Top-Down Approaches
Stochastic Correlation Models
Quantifying Market Correlation Risk
Quantifying Credit Correlation Risk
Hedging Correlation Risk
Correlation Trading Strategies – Opportunities and Limitations
Credit Value at Risk under Basel III – Too Simplistic?
Basel III and XVAs
Fundamental Review of the Trading Book
The Future of Correlation Modelling
Answers to Questions and Problems in Correlation Risk Modelling and Management
“I’m very close to thinking the United States shouldn’t be in Basel anymore”
– Jamie Dimon
In this chapter, we will discuss the Basel Accord’s view on the adjustments to the no-default value of a derivatives portfolio, collectively called XVAs. There is no shortage of XVAs. We have the following.
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CVA: credit value adjustment. Addresses counterparty credit risk in a derivatives portfolio.
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DVA: debt value adjustment. Also addresses counterparty credit risk in a derivatives portfolio. However, it addresses an entity’s own credit risk. If allowed, DVA will increase the no-default value of the derivatives portfolio.
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FVA: funding value adjustment. An adjustment to the price of a transaction due to the cost of funding the transaction or the related hedge.
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ColVA: collateral value adjustment. Also termed IOS (index overnight swap) adjustment. Is an adjustment for the cost of funding the collateral in a derivatives transaction or the related hedge. ColVA can increase or decrease the value of a derivatives portfolio.
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KVA: regulatory capital adjustment. An adjustment for holding regulatory capital during the life of the derivative.
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MVA: adjustment for
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