Modern Derivatives Pricing and Credit Exposure Analysis: Theory and Practice of CSA and XVA Pricing, Exposure Simulation and Backtesting (Applied Quantitative Finance)

This Book Provides A Comprehensive Guide For Modern Derivatives Pricing And Credit Analysis. Written To Provide Sound Theoretical Detail But Practical Implication, It Provides Readers With Everything They Need To Know To Price Modern Financial Derivatives And Analyze The Credit Exposure Of A Financial Instrument In Today's Markets. Cover ; Half-title ; Title; Copyright; Dedication; Contents; List Of Figures; List Of Tables; Preface; Acknowledgements; List Of Abbreviations And Symbols; I Discounting; 1 Discounting Before The Crisis; 1.1 The Risk-free Rate; 1.2 Pricing Linear Instruments; 1.2.1 Forward Rate Agreements; 1.2.2 Interest Rate Swaps; 1.2.3 Fx Forwards; 1.2.4 Tenor Basis Swaps; 1.2.5 Cross-currency Basis Swaps; 1.3 Curve Building; 1.4 Pricing Non-linear Instruments; 1.4.1 Caps And Floors; 1.4.2 Swaptions 2 What Changed With The Crisis; 2.1 Basis Products And Spreads; 2.1.1 Tenor Basis Swaps; 2.1.2 Cross-currency Basis Swaps; 2.2 Collateralization; 3 Clearing House Pricing; 3.1 Introduction Of Central Counterparties; 3.2 Margin Requirements; 3.3 Building The Ois Curve; 3.4 Usd Specialities; 3.5 Building The Forward Projection Curves; 3.6 More Usd Specialities; 3.7 Example: Implying The Par Asset Swap Spread; 3.8 Interpolation; 3.9 Pricing Non-linear Instruments; 3.9.1 European Swaptions; 3.9.2 Bermudan Swaptions 3.10 Not All Currencies Are Equal; 4 Global Discounting; 4.1 Collateralization In A Foreign Currency; 4.2 Non-rebalancing Cross-currency Swaps; 4.3 Rebalancing Cross-currency Swaps; 4.4 Examples: Approximations Of Basis Spreads; 4.4.1 Tenor Basis Spreads; 4.4.2 Flat Cross-currency Swaps; 4.4.3 Ois Cross-currency Basis Spread; 4.4.4 Libor Cross-currency Basis Spread; 5 Csa Discounting; 5.1 Isda Agreements And Csa Complexities; 5.2 Currency Options; 5.3 Negative Overnight Rates; 5.4 Other Assets As Collateral 5.5 Thresholds And Asymmetries; 5.6 Some Thoughts On Initial Margin; 6 Fair Value Hedge Accounting In A Multi-curve World; 6.1 Introduction; 6.2 Hedge Effectiveness; 6.3 Single-curve Valuation; 6.4 Multi-curve Valuation; Ii Credit And Debit Value Adjustment; 7 Introduction; 8 Fundamentals; 8.1 Unilateral Cva; 8.2 Bilateral Cva; 9 Single Trade Cva; 9.1 Interest Rate Swap; 9.1.1 Exercise Within Interest Periods; 9.1.2 Amortizing Swap; 9.1.3 A Simple Swap Cva Model; 9.2 Cash-settled European Options; 9.3 Fx Forward 9.4 Cross-currency Swap; 9.5 Rebalancing Cross-currency Swap; Iii Risk Factor Evolution; 10 Introduction -- A Monte Carloframework; 11 Interest Rates; 11.1 Linear Gauss Markov Model; 11.1.1 Multiple Curves; 11.1.2 Invariances; 11.1.3 Relation To The Hull-white Model In T-forward Measure; 11.2 Products; 11.2.1 Zero Bond Option; 11.2.2 European Swaption; 11.2.3 Bermudan Swaption With Deterministic Basis; 11.2.4 Stochastic Basis; 11.3 Csa Discounting Revisited; 11.4 Exposure Evolution Examples; 12 Foreign Exchange By Roland Lichters, Roland Stamm, Donal Gallagher. Includes Bibliographical References And Index. Front Matter....Pages i-xxxii Front Matter....Pages 1-1 Discounting Before the Crisis....Pages 3-13 What Changed with the Crisis....Pages 14-20 Clearing House Pricing....Pages 21-34 Global Discounting....Pages 35-43 CSA Discounting....Pages 44-51 Fair Value Hedge Accounting in a Multi-Curve World....Pages 52-66 Front Matter....Pages 67-67 Introduction....Pages 69-70 Fundamentals....Pages 71-78 Single Trade CVA....Pages 79-101 Front Matter....Pages 103-103 Introduction — A Monte Carlo Framework....Pages 105-106 Interest Rates....Pages 107-133 Foreign Exchange....Pages 134-154 Inflation....Pages 155-184 Equity and Commodity....Pages 185-190 Credit....Pages 191-234 Front Matter....Pages 235-235 Cross-Asset Scenario Generation....Pages 240-258 Netting and Collateral....Pages 259-266 Early Exercise and American Monte Carlo....Pages 267-273 CVA Risk and Algorithmic Differentiation....Pages 274-282 FVA....Pages 283-305 Front Matter....Pages 235-235 KVA....Pages 306-309 Front Matter....Pages 311-311 Introduction....Pages 313-332 Pricing Portfolio Credit Products....Pages 333-350 Credit Risk and Basel Capital for Derivatives....Pages 351-379 Backtesting....Pages 380-392 Front Matter....Pages 393-393 The Change of Numeraire Toolkit....Pages 395-397 The Feynman-Kac Connection....Pages 398-399 The Black76 Formula....Pages 400-402 Hull-White Model....Pages 403-422 Linear Gauss Markov Model....Pages 423-432 Dodgson-Kainth Model....Pages 433-440 CIR Model with Jumps....Pages 441-445 CDS and CDS Option: Filtration Switching and the PK Model....Pages 446-449 Back Matter....Pages 450-466