Relevant bibliographies by topics / Funding Valuation Adjustment

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Academic literature on the topic 'Funding Valuation Adjustment'

Author: Grafiati
Published: 4 June 2021
Last updated: 1 February 2022

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Journal articles on the topic "Funding Valuation Adjustment"

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CRÉPEY, STÉPHANE, RÉMI GERBOUD, ZORANA GRBAC, and NATHALIE NGOR. "COUNTERPARTY RISK AND FUNDING: THE FOUR WINGS OF THE TVA." International Journal of Theoretical and Applied Finance 16, no. 02 (March 2013): 1350006. http://dx.doi.org/10.1142/s0219024913500064.

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The credit crisis and the ongoing European sovereign debt crisis have highlighted the native form of credit risk, namely the counterparty risk. The related credit valuation adjustment (CVA), debt valuation adjustment (DVA), liquidity valuation adjustment (LVA) and replacement cost (RC) issues, jointly referred to in this paper as total valuation adjustment (TVA), have been thoroughly investigated in the theoretical papers [8, 9]. The present work provides an executive summary and numerical companion to these papers, through which the TVA pricing problem can be reduced to Markovian pre-default TVA BSDEs. The first step consists in the counterparty clean valuation of a portfolio of contracts, which is the valuation in a hypothetical situation where the two parties would be risk-free and funded at a risk-free rate. In the second step, the TVA is obtained as the value of an option on the counterparty clean value process called contingent credit default swap (CCDS). Numerical results are presented for interest rate swaps in the Vasicek, as well as in the inverse Gaussian Hull-White short rate model, which allows also to assess the related model risk issue.
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Han, Meng, Yeqi He, and Hu Zhang. "A note on discounting and funding value adjustments for derivatives." Journal of Financial Engineering 01, no. 01 (March 2014): 1450008. http://dx.doi.org/10.1142/s2345768614500081.

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In this paper, valuation of a derivative partially collateralized in a specific foreign currency defined in its credit support annex traded between default-free counterparties is studied. Two pricing approaches — by hedging and by expectation — are presented to obtain similar valuation formulae which are equivalent under certain conditions. Our findings show that the current marking-to-market value of such a derivative consists of three components: the price of the perfectly collateralized derivative (a.k.a. the price by collateral rate discounting), the value adjustment due to different funding spreads between the payoff currency and the collateral currency, and the value adjustment due to funding requirements of the uncollateralized exposure. These results generalize previous works on discounting for fully collateralized derivatives and on funding value adjustments for partially collateralized or uncollateralized derivatives.
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NAUTA, BERT-JAN. "LIQUIDITY RISK, INSTEAD OF FUNDING COSTS, LEADS TO A VALUATION ADJUSTMENT FOR DERIVATIVES AND OTHER ASSETS." International Journal of Theoretical and Applied Finance 18, no. 02 (March 2015): 1550014. http://dx.doi.org/10.1142/s0219024915500144.

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Traditionally derivatives have been valued in isolation. The balance sheet of which a derivative position is part, was not included in the valuation. Recently however, aspects of the valuation have been revised to incorporate certain elements of the balance sheet. Examples are the debt valuation adjustment which incorporates default risk of the bank holding the derivative, and the funding valuation adjustment that some authors have proposed to include the cost of funding into the valuation. This paper investigates the valuation of derivatives as part of a balance sheet. In particular, the paper considers funding costs, default risk and liquidity risk. A valuation framework is developed under the elastic funding assumption. This assumption states that funding costs reflect the quality of the assets, and any change in asset composition is immediately reflected in the funding costs. The result is that funding costs should not affect the value of derivatives. Furthermore, a new model for pricing liquidity risk is described. The paper highlights that the liquidity spread, used for discounting cashflows of illiquid assets, should be expressed in terms of the liquidation value (LV) of the asset, and the probability that the institution holding the asset needs to liquidate its assets.
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Singh, Derek, and Shuzhong Zhang. "Distributionally Robust XVA via Wasserstein Distance: Wrong Way Counterparty Credit and Funding Risk." Applied Economics and Finance 7, no. 6 (October 27, 2020): 70. http://dx.doi.org/10.11114/aef.v7i6.5060.

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This paper investigates calculations of robust X-Value adjustment (XVA), in particular, credit valuation adjustment (CVA) and funding valuation adjustment (FVA), for over-the-counter derivatives under distributional ambiguity using Wasserstein distance as the ambiguity measure. Wrong way counterparty credit risk and funding risk can be characterized (and indeed quantified) via the robust XVA formulations. The simpler dual formulations are derived using recent Lagrangian duality results. Next, some computational experiments are conducted to measure the additional XVA charges due to distributional ambiguity under a variety of portfolio and market configurations. Finally some suggestions for further work are discussed.
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Wu, Lixin, and Chonhong Li. "FVA and CVA under margining." Studies in Economics and Finance 32, no. 3 (August 3, 2015): 298–321. http://dx.doi.org/10.1108/sef-08-2014-0162.

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Purpose – The purpose of this paper is to provide a framework of replication pricing of derivatives and identify funding valuation adjustment (FVA) and credit valuation adjustments (CVA) as price components. Design/methodology/approach – The authors propose the notion of bilateral replication pricing. In the absence of funding cost, it reduces to unilateral replication pricing. The absence of funding costs, it introduces bid–ask spreads. Findings – The valuation of CVA can be separated from that of FVA, so-called split up. There may be interdependence between FVA and the derivatives value, which then requires a recursive procedure for their numerical solution. Research limitations/implications – The authors have assume deterministic interest rates, constant CDS rates and loss rates for the CDS. The authors have also not dealt with re-hypothecation risks. Practical implications – The results of this paper allow user to identify CVA and FVA, and mark to market their derivatives trades according to the recent market standards. Originality/value – For the first time, a line between the risk-neutral pricing measure and the funding risk premiums is drawn. Also, the notion of bilateral replication pricing extends the unilateral replication pricing.
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Chataigner, Marc, and Stéphane Crépey. "Credit Valuation Adjustment Compression by Genetic Optimization." Risks 7, no. 4 (September 29, 2019): 100. http://dx.doi.org/10.3390/risks7040100.

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Since the 2008–2009 financial crisis, banks have introduced a family of X-valuation adjustments (XVAs) to quantify the cost of counterparty risk and of its capital and funding implications. XVAs represent a switch of paradigm in derivative management, from hedging to balance sheet optimization. They reflect market inefficiencies that should be compressed as much as possible. In this work, we present a genetic algorithm applied to the compression of credit valuation adjustment (CVA), the expected cost of client defaults to a bank. The design of the algorithm is fine-tuned to the hybrid structure, both discrete and continuous parameter, of the corresponding high-dimensional and nonconvex optimization problem. To make intensive trade incremental XVA computations practical in real-time as required for XVA compression purposes, we propose an approach that circumvents portfolio revaluation at the cost of disk memory, storing the portfolio exposure of the night so that the exposure of the portfolio augmented by a new deal can be obtained at the cost of computing the exposure of the new deal only. This is illustrated by a CVA compression case study on real swap portfolios.
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Brigo, Damiano, and Andrea Pallavicini. "Nonlinear consistent valuation of CCP cleared or CSA bilateral trades with initial margins under credit, funding and wrong-way risks." Journal of Financial Engineering 01, no. 01 (March 2014): 1450001. http://dx.doi.org/10.1142/s2345768614500019.

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The introduction of Central Clearing Counterparties (CCPs) in most derivative transactions will dramatically change the landscape of derivatives pricing, hedging and risk management, and, according to the TABB Group, will lead to an overall liquidity impact of about USD 2 trillions. In this paper, we develop for the first time a comprehensive approach for pricing under CCP clearing, including variation and initial margins, gap credit risk and collateralization, showing concrete examples for interest rate swaps. This framework stems from our 2011 framework on credit, collateral and funding costs in Pallavicini et al. (Pallavicini, A., D. Perini and D. Brigo, 2011, Funding Valuation Adjustment: FVA consistent with CVA, DVA, WWR, Collateral, Netting and Re-hypothecation, arxiv.org, ssrn.com). Mathematically, the inclusion of asymmetric borrowing and lending rates in the hedge of a claim, and a replacement closeout at default, lead to nonlinearities showing up in claim dependent pricing measures, aggregation dependent prices, nonlinear Partial Differential Equations (PDEs) and Backward Stochastic Differential Equations (BSDEs). This still holds in presence of CCPs and CSA. We introduce a modeling approach that allows us to enforce rigorous separation of the interconnected nonlinear risks into different valuation adjustments where the key pricing nonlinearities are confined to a funding costs component that is analyzed through numerical schemes for BSDEs. We present a numerical case study for Interest Rate Swaps that highlights the relative size of the different valuation adjustments and the quantitative role of initial and variation margins, of liquidity bases, of credit risk, of the margin period of risk and of wrong-way risk correlations.
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WU, LIXIN. "CVA AND FVA TO DERIVATIVES TRADES COLLATERALIZED BY CASH." International Journal of Theoretical and Applied Finance 18, no. 05 (July 28, 2015): 1550035. http://dx.doi.org/10.1142/s0219024915500351.

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In this paper, we consider replication pricing of derivatives that are partially collateralized by cash. We let issuer replicate the derivatives payout using shares and cash, and let buyer replicate the loss given the counterparty default using credit default swaps. The costs of funding for replication and collateral posting are taken into account in the pricing process. A partial differential equation (PDE) for the derivatives price is established, and its solution is provided in a Feynman–Kac formula, which decomposes the derivatives value into the risk-free value of the derivative plus credit valuation adjustment (CVA) and funding valuation adjustment (FVA). For most derivatives, we show that CVAs can be evaluated analytically or semi-analytically, while FVAs as well as the derivatives values can be solved recursively through numerical procedures due to their interdependence. In numerical demonstrations, continuous and discrete margin revisions are considered, respectively, for an equity call option and a vanilla interest-rate swap.
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Iyer, Subramaniam. "Stochastic Actuarial Modelling of a Defined-Benefit Social Security Pension Scheme: An Analytical Approach." Annals of Actuarial Science 3, no. 1-2 (September 2008): 127–85. http://dx.doi.org/10.1017/s174849950000049x.

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ABSTRACTAmong the systems in place in different countries for the protection of the population against the long-term contingencies of old-age (or retirement), disability and death (or survivorship), defined-benefit social security pension schemes, i.e. social insurance pension schemes, by far predominate, despite the recent trend towards defined-contribution arrangements in social security reforms. Actuarial valuations of these schemes, unlike other branches of insurance, continue to be carried out almost exclusively on traditional, deterministic lines. Stochastic applications in this area, which have been restricted mainly to occasional special studies, have relied on the simulation technique. This paper develops an analytical model for the stochastic actuarial valuation of a social insurance pension scheme. Formulae are developed for the expected values, variances and covariances of and among the benefit expenditure and salary bill projections and their discounted values, allowing for stochastic variation in three key input factors, i.e., mortality, new entrant intake, and interest (net of salary escalation). Each deterministic output of the valuation is thus supplemented with a confidence interval, that is, a range with an attached probability. The treatment covers the premiums under the different possible financial systems for these schemes, which differ from the funding methods of private pensions, as well as the testing of the level of the Fund ratio when the future contributions schedule is pre-determined. Although it is based on a relatively simplified approach and refers only to retirement pensions, with full adjustment in line with salary escalation, the paper brings out the stochastic features of pension scheme projections and illustrates a comprehensive stochastic valuation. It is hoped that the paper will stimulate interest in further research, both of a theoretical and a practical nature, and lead to progressively increasing recourse to stochastic methods in social insurance pension scheme valuations.
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Prorokowski, Lukasz, and Hubert Prorokowski. "FVA – Sailing on the uncharted waters." Journal of Financial Regulation and Compliance 23, no. 1 (February 9, 2015): 31–54. http://dx.doi.org/10.1108/jfrc-01-2014-0005.

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Purpose – This report aims to investigate the approaches taken by financial institution to implement and compute the funding valuation adjustment (FVA). FVA can be defined as the incremental cost attributable to trades with non-collateralised counterparties. This cost emerges related to the need to fund the collateral calls associated with collateralised hedge trades. In this respect, one common challenge faced by banks relates to designing appropriate methodological approaches to compute an FVA. Design/methodology/approach – Recognising the growing importance of an FVA, this report is designed to investigate different approaches to computing FVA and pricing funding costs into the uncollateralised positions. Embarking on semi-structured interviews, the report explores the methodologies and structural solutions utilised by global banks. Findings – This report has indicated several influential trends that shape the nascent FVA landscape, as well as innovative initiatives undertaken by the banks to effectively use this metric. Going forward, this paper has pointed to a number of current and future challenges faced by the participating banks with regard to implementing the FVA. Originality/value – Before regulators make FVA punitive, unprofitable or inadequate by propagating the move to collateralised trading or introducing sanctions on banks recognising FVA in their financial statements, and thus reducing banks’ exposure to arbitrage opportunities, FVA will remain a challenging metric for the banking industry in the near future. Therefore, it is pivotal to understand any potential risks and operational difficulties arising from “sailing on the uncharted waters with FVA”. Moreover, it is necessary to understand market consensus on methodological approaches to computing FVA, as well as practices around constructing the bank’s own cost of funds curves.
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Dissertations / Theses on the topic "Funding Valuation Adjustment"

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Šedivý, Jan. "Vliv rizika protistrany na oceňování derivátů a jeho dopady na chování bank." Doctoral thesis, Vysoká škola ekonomická v Praze, 2016. http://www.nusl.cz/ntk/nusl-205440.

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In the thesis we analyse changes in derivatives valuation after the financial crisis and their impact on behaviour of financial institutions. We focus mainly on the changes related to counterparty credit risk and valuation adjustments. We describe in economical terms the relationship between counterparty credit risk and traditional credit risk, we also introduce management and modelling of this risk. In second part of the study we analyse the regulatory framework, in particular new capital requirement and mandatory central clearing of OTC derivatives. We discuss inconsistencies between regulatory and internal approaches to the counterparty risk measurement and also significant systemic risk connected to central counterparties. Finally we investigate the impact of changes in derivatives valuation on banks in both the EU and the Czech Republic. Specifically we are interested in optimal approach to entering into derivative trade.
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Iben, Taarit Marouan. "Valorisation des ajustements Xva : de l’exposition espérée aux risques adverses de corrélation." Thesis, Paris Est, 2018. http://www.theses.fr/2018PESC1059/document.

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Nous entamons ce rapport de thèse par l’évaluation de l’espérance espérée qui représente une des composantes majeures des ajustements XVA. Sous l’hypothèse d’indépendance entre l’exposition et les coûts de financement et de crédit, nous dérivons dans le chapitre 3 une représentation nouvelle de l’exposition espérée comme la solution d’une équation différentielle ordinaire par rapport au temps d’observation du défaut. Nous nous basons, pour le cas unidimensionnel, sur des arguments similaires à ceux de la volatilité locale de Dupire. Et pour le cas multidimensionnel, nous nous référons à la formule de la Co-aire. Cette représentation permet d’expliciter l’impact de la volatilité sur l’exposition espérée : Cette valeur temps fait intervenir la volatilité des sous-jacents ainsi que la sensibilité au premier ordre du prix, évalués sur un ensemble fini de points. Malgré des limitations numériques, cette méthode est une approche précise et rapide pour la valorisation de la XVA unitaire en dimension 1 et 2.Les chapitres suivants sont dédiés aux aspects du risque de corrélations entre les enveloppes d’expositions et les coûts XVA. Nous présentons une modélisation du risque général de corrélation à travers une diffusion stochastique multivariée, comprenant à la fois les sous-jacents des dérivés et les intensités de défaut. Dans ce cadre, nous exposons une nouvelle approche de valorisation par développements asymptotiques, telle que le prix d’un ajustement XVA correspond au prix de l’ajustement à corrélation nulle, auquel s’ajoute une somme explicite de termes correctifs. Le chapitre 4 est consacré à la dérivation technique et à l’étude de l’erreur numérique dans le cadre de la valorisation de dérivés contingents au défaut. La qualité des approximations numériques dépend uniquement de la régularité du processus de diffusion de l’intensité de crédit, et elle est indépendante de la régularité de la fonction payoff. Les formules de valorisation pour CVA et FVA sont présentées dans le chapitre 5. Une généralisation des développements asymptotiques pour le cadre bilatéral de défaut est adressée dans le chapitre 6.Nous terminons ce mémoire en abordant un cas du risque spécifique de corrélation lié aux contrats de migration de rating. Au-delà des formules de valorisation, notre contribution consiste à présenter une approche robuste pour la construction et la calibration d’un modèle de transition de ratings consistant avec les probabilités de défaut implicites de marché
The point of departure of this thesis is the valuation of the expected exposure which represents one of the major components of XVA adjustments. Under independence assumptions with credit and funding costs, we derive in Chapter 3 a new representation of the expected exposure as the solution of an ordinary differential equation w.r.t the default time variable. We rely on PDE arguments in the spirit of Dupire’s local volatility equation for the one dimensional problem. The multidimensional extension is addressed using the co-area formula. This forward representation gives an explicit expression of the exposure’s time value, involving the local volatility of the underlying diffusion process and the first order Greek delta, both evaluated only on finite set of points. From a numerical perspective, dimensionality is the main limitation of this approach. Though, we highlight high accuracy and time efficiency for standalone calculations in dimensions 1 and 2.The remaining chapters are dedicated to aspects of the correlation risk between the exposure and XVA costs. We start with the general correlation risk which is classically modeled in a joint diffusion process for market variables and the credit/funding spreads. We present a novel approach based on asymptotic expansions in a way that the price of an XVA adjustment with correlation risk is given by the classical correlation-free adjustment to which is added a sum of explicit correction terms depending on the exposure Greeks. Chapter 4 is consecrated to the technical derivation and error analysis of the expansion formulas in the context of pricing credit contingent derivatives. The accuracy of the valuation approach is independent of the smoothness of the payoff function, but it is related to the regularity of the credit intensity model. This finding is of special interest for pricing in a real financial context. Pricing formulas for CVA and FVA adjustments are derived in Chapter 5, along with numerical experiments. A generalization of the asymptotic expansions to a bilateral default risk setting is addressed in Chapter 6.Our thesis ends by tackling the problem of modeling the specific Right-Way Risk induced by rating trigger events within the collateral agreements. Our major contribution is the calibration of a rating transition model to market implied default probabilities
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Books on the topic "Funding Valuation Adjustment"

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Green, Andrew, ed. XVA: Credit, Funding and Capital Valuation Adjustments. Chichester, UK: John Wiley & Sons, Ltd, 2015. http://dx.doi.org/10.1002/9781119161233.

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CVA Credit and Funding Valuation Adjustment Wiley Finance Series. John Wiley & Sons Inc, 2014.

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Green, Andrew. Xva: Credit, Funding and Capital Valuation Adjustments. Wiley & Sons, Incorporated, John, 2015.

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Green, Andrew. Xva: Credit, Funding and Capital Valuation Adjustments. Wiley & Sons, Incorporated, John, 2015.

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Book chapters on the topic "Funding Valuation Adjustment"

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"Funding Valuation Adjustment (FVA)?" In Counterparty Credit Risk, Collateral and Funding, 361–83. Chichester, UK: John Wiley & Sons, Ltd, 2013. http://dx.doi.org/10.1002/9781118818589.ch17.

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"Funding and Valuation." In Counterparty Credit Risk and Credit Value Adjustment, 283–306. Oxford, UK: John Wiley & Sons Ltd, 2013. http://dx.doi.org/10.1002/9781118673638.ch14.

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"Funding Costs: Funding Valuation Adjustment (FVA)." In XVA: Credit, Funding and Capital Valuation Adjustments, 139–66. Chichester, UK: John Wiley & Sons, Ltd, 2015. http://dx.doi.org/10.1002/9781119161233.ch9.

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"KVA: Capital Valuation Adjustment." In XVA: Credit, Funding and Capital Valuation Adjustments, 227–37. Chichester, UK: John Wiley & Sons, Ltd, 2015. http://dx.doi.org/10.1002/9781119161233.ch13.

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"CVA Risk Warehousing and Tax Valuation Adjustment (TVA)." In XVA: Credit, Funding and Capital Valuation Adjustments, 239–45. Chichester, UK: John Wiley & Sons, Ltd, 2015. http://dx.doi.org/10.1002/9781119161233.ch14.

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"CVA and DVA: Credit and Debit Valuation Adjustment Models." In XVA: Credit, Funding and Capital Valuation Adjustments, 39–63. Chichester, UK: John Wiley & Sons, Ltd, 2015. http://dx.doi.org/10.1002/9781119161233.ch3.

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"The Funding Curve." In XVA: Credit, Funding and Capital Valuation Adjustments, 187–92. Chichester, UK: John Wiley & Sons, Ltd, 2015. http://dx.doi.org/10.1002/9781119161233.ch11.

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"Introduction: The Valuation of Derivative Portfolios." In XVA: Credit, Funding and Capital Valuation Adjustments, 1–21. Chichester, UK: John Wiley & Sons, Ltd, 2015. http://dx.doi.org/10.1002/9781119161233.ch1.

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"Hybrid Monte Carlo Models for XVA: Building a Model for the Expected-Exposure Engine." In XVA: Credit, Funding and Capital Valuation Adjustments, 261–351. Chichester, UK: John Wiley & Sons, Ltd, 2015. http://dx.doi.org/10.1002/9781119161233.ch16.

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"Building the Technological Infrastructure." In XVA: Credit, Funding and Capital Valuation Adjustments, 393–421. Chichester, UK: John Wiley & Sons, Ltd, 2015. http://dx.doi.org/10.1002/9781119161233.ch20.

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