Landmarks in XVA
First published:
ISBN: 9781782722939
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Regulatory-Optimal Funding
Regulatory-Optimal Funding
Introduction
Preface to Chapter 1
Being Two-Faced over Counterparty Credit Risk
Risky Funding: A Unified Framework for Counterparty and Liquidity Charges
DVA for Assets
Pricing CDSs’ Capital Relief
The FVA Debate
The FVA Debate: Reloaded
Regulatory Costs Break Risk Neutrality
Risk Neutrality Stays
Regulatory Costs Remain
Funding beyond Discounting: Collateral Agreements and Derivatives Pricing
Cooking with Collateral
Options for Collateral Options
Partial Differential Equation Representations of Derivatives with Bilateral Counterparty Risk and Funding Costs
In the Balance
Funding Strategies, Funding Costs
The Funding Invariance Principle
Regulatory-Optimal Funding
Close-Out Convention Tensions
Funding, Collateral and Hedging: Arbitrage-Free Pricing with Credit, Collateral and Funding Costs
Bilateral Counterparty Risk with Application to Credit Default Swaps
KVA: Capital Valuation Adjustment by Replication
From FVA to KVA: Including Cost of Capital in Derivatives Pricing
Warehousing Credit Risk: Pricing, Capital and Tax
MVA by Replication and Regression
Smoking Adjoints: Fast Evaluation of Monte Carlo Greeks
Adjoint Greeks Made Easy
Bounding Wrong-Way Risk in Measuring Counterparty Risk
Wrong-Way Risk the Right Way: Accounting for Joint Defaults in CVA
Backward Induction for Future Values
A Non-Linear PDE for XVA by Forward Monte Carlo
Efficient XVA Management: Pricing, Hedging and Allocation
Accounting for KVA under IFRS 13
FVA Accounting, Risk Management and Collateral Trading
Derivatives Funding, Netting and Accounting
Managing XVA in the Ring-Fenced Bank
XVA: A Banking Supervisory Perspective
An Annotated Bibliography of XVA
Trading desks that require funding typically must pay above the risk-free rate. This has led some to add a funding valuation adjustment (FVA) to derivatives prices, and to a heated debate over the legitimacy of this practice (Hull and White 2012). At the time of writing some firms were starting to report explicit FVA line items. However, the FVA literature treats the funding curve as an input to the model (Burgard and Kjaer 2011; Morini and Prampolini 2011). This can vary from the firm’s senior unsecured debt to internally set curves.
Few studies have examined how a bank can fund itself in practice, but banks have long been engaged in the practice of maturity transformation, receiving funding sources such as deposits of uncertain maturity while making long-term loans. This maturity transformation, while central to banking activities, is a source of risk, and this has attracted regulatory attention.
Tougher regulatory requirements for liquidity buffers, such as those proposed by the UK Financial Services Authority in 2009 and implemented by its successor, the Prudential Regulatory Authority (PRA), put constraints on the minimum funding levels banks can have (Financial Services
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