XVA Desks - A New Era for Risk Management: Understanding, Building and Managing Counterparty, Funding and Capital Risk (Applied Quantitative Finance)

Written by a practitioner with years working in CVA, FVA and DVA this is a thorough, practical guide to a topic at the very core of the derivatives industry. It takes readers through all aspects of counterparty credit risk management and the business cycle of CVA, DVA and FVA, focusing on risk management, pricing considerations and implementation. XVA Desks: A New Era for Risk Management is a comprehensive guide to the fundamentals and latest developments in this rapidly expanding field. Written by a seasoned practitioner, it begins with an overview of the role of OTC derivatives in the current banking industry. The book then goes into the fundamentals of counterparty credit and funding risk, explaining in detail how to build appropriate models. This includes an in-depth explanation of Monte Carlo simulations, collateral modelling, exposure allocation, simplified calculations, the role of central counterparties, and right and wrong way risk. The book then considers the latest research in the valuation adjustments that are currently being implemented by the trading houses: CVA, DVA, FVA, LVA, CollVA, KVA, etc - with examples illustrating the meaning of these adjustments, why they exist, their inter-relationships, hedging and how they are changing trading and risk management behaviour. The book also covers the calculation of regulatory capital in financial institutions, explaining all the necessary components. A full chapter is dedicated to the emergence of model risk, with detail on a number of backtesting frameworks that can be implemented. Finally, the book dedicates a chapter to systems and project management in the context of counterparty and funding risk, highlighting key success factors in this space. XVA Desks: A New Era for Risk Management will provide practitioners and academics with a comprehensive treatment of counterparty and funding risks, and is an essential reference for risk management practitioners, traders, structures, quants working in the front and middle offices of banks and other financial institutions, students and researchers in this space Front Matter....Pages i-xxiii Front Matter....Pages 1-1 The Banking Industry, OTC Derivatives and the New XVA Challenge....Pages 3-15 Front Matter....Pages 17-17 The Roots of Counterparty Credit Risk....Pages 19-32 Exposure Measurement for Uncollateralised Portfolios....Pages 33-69 Exposure Measurement for Collateralised Portfolios....Pages 70-84 Exposure Allocation....Pages 85-92 Proxies for Exposure Measurement....Pages 93-103 Default Probability, Loss Given Default, and Credit Portfolio Models....Pages 104-125 Pricing Counterparty Credit Risk....Pages 126-142 Regulatory Capital....Pages 143-166 Right and Wrong Way Risk....Pages 167-189 Front Matter....Pages 191-191 CVA Desk, a Bilateral Dance....Pages 193-222 FVA Desk, the Effect of Funding....Pages 223-240 Calculating and Managing FVA....Pages 241-256 KVA Desk, Capital Management, and RAROC....Pages 257-273 XVA Desks: A New Era for Risk Management....Pages 274-290 Front Matter....Pages 291-291 Model Risk Management....Pages 293-301 Backtesting Risk Models....Pages 302-313 Systems and Project Management....Pages 314-330 Central Clearing and the Future of Derivatives....Pages 331-344 Back Matter....Pages 345-407