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The optimisation of everything: OTC derivatives, counterparty risk and funding

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The global financial crisis has created much excitement around counterparty credit risk (CCR) and, in recognition of this, banks have been improving their practices around CCR.

In particular, the use of credit value adjustment (CVA) to facilitate pricing and management of CCR has increased significantly. Indeed, many banks have CVA desks that are responsible for pricing and managing CVA across trading functions.

In addition to CVA, debt value adjustment (DVA) is often used as recognition of the 'benefit' arising from one's own default and funding aspects may be considered via funding value adjustment (FVA). Also, the impact that collateral has on CVA, DVA and FVA is important to quantify.

Finally, there is a need to consider the impact of the funding requirements and systemic risk when trading with central counterparties (CCPs).

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