By Stéphane Crépey, Tomasz R. Bielecki, Damiano Brigo
Solve the DVA/FVA Overlap factor and successfully deal with Portfolio credits Risk
Counterparty danger and investment: A story of 2 Puzzles explains how you can examine chance embedded in monetary transactions among the financial institution and its counterparty. The authors supply an analytical foundation for the quantitative technique of dynamic valuation, mitigation, and hedging of bilateral counterparty hazard on over the counter (OTC) spinoff contracts below investment constraints. They discover credits, debt, investment, liquidity, and ranking valuation adjustment (CVA, DVA, FVA, LVA, and RVA) in addition to substitute fee (RC), wrong-way danger, a number of investment curves, and collateral.
The first a part of the booklet assesses today’s monetary panorama, together with the present multi-curve fact of economic markets. In mathematical yet model-free phrases, the second one half describes all of the easy components of the pricing and hedging framework. Taking a more effective slant, the 3rd half introduces a reduced-form modeling procedure during which the chance of default of the 2 events in basic terms exhibits up via their default intensities. The fourth half addresses counterparty danger on credits derivatives via dynamic copula types. within the 5th half, the authors current a credits migrations version for you to account for rating-dependent credits aid annex (CSA) clauses. in addition they contact on nonlinear FVA computations in credits portfolio versions. the ultimate half covers classical instruments from stochastic research and provides a quick creation to the idea of Markov copulas.
The credits situation and ongoing ecu sovereign debt concern have proven the significance of the correct evaluation and administration of counterparty probability. This booklet specializes in the interplay and attainable overlap among DVA and FVA phrases. It additionally explores the relatively not easy factor of counterparty chance in portfolio credits modeling. basically for researchers and graduate scholars in monetary arithmetic, the booklet can also be compatible for monetary quants, managers in banks, CVA desks, and contributors of supervisory bodies.