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Index
Cover
About The Book
Series
Title Page
Copyright
Ignition
TIMELINE
THIS BOOK AND NEW-GENERATION FINANCIAL MODELLING
THE STRUCTURE OF THE BOOK
ACKNOWLEDGMENTS
Abbreviations and Notation
ACRONYMS:
PROBABILITY MEASURES, EXPECTATIONS, FILTRATIONS
PRODUCTS PAYOFFS, TERMS, VARIABLES AND PRICES
VECTOR/MATRIX NOTATION et al.
Part I: Counterparty Credit Risk, Collateral and Funding
Chapter 1: Introduction
1.1 A DIALOGUE ON CVA
1.2 RISK MEASUREMENT: CREDIT VaR
1.3 EXPOSURE, CE, PFE, EPE, EE, EAD
1.4 EXPOSURE AND CREDIT VaR
1.5 INTERLUDE: P AND Q
1.6 BASEL
1.7 CVA AND MODEL DEPENDENCE
1.8 INPUT AND DATA ISSUES ON CVA
1.9 EMERGING ASSET CLASSES: LONGEVITY RISK
1.10 CVA AND WRONG WAY RISK
1.11 BASEL III: VaR OF CVA AND WRONG WAY RISK
1.12 DISCREPANCIES IN CVA VALUATION: MODEL RISK AND PAYOFF RISK
1.13 BILATERAL COUNTERPARTY RISK: CVA AND DVA
1.14 FIRST-TO-DEFAULT IN CVA AND DVA
1.15 DVA MARK-TO-MARKET AND DVA HEDGING
1.16 IMPACT OF CLOSE-OUT IN CVA AND DVA
1.17 CLOSE-OUT CONTAGION
1.18 COLLATERAL MODELLING IN CVA AND DVA
1.19 RE-HYPOTHECATION
1.20 NETTING
1.21 FUNDING
1.22 HEDGING COUNTERPARTY RISK: CCDS
1.23 RESTRUCTURING COUNTERPARTY RISK: CVA-CDOs AND MARGIN LENDING
Chapter 2: Context
2.1 Definition of Default: Six basic cases
2.2 DEFINITION OF EXPOSURES
2.3 DEFINITION OF CREDIT VALUATION ADJUSTMENT (CVA)
2.4 COUNTERPARTY RISK MITIGANTS: NETTING
2.5 COUNTERPARTY RISK MITIGANTS: COLLATERAL
2.6 FUNDING
2.7 VALUE AT RISK (VaR) aND EXPECTED SHORTFALL (ES) OF CVA
2.8 THE DILEMMA OF REGULATORS AND BASEL III
Chapter 3: Modelling the Counterparty Default
3.1 FIRM VALUE (OR STRUCTURAL) MODELS
3.2 FIRM VALUE MODELS: HINTS AT THE MULTINAME PICTURE
3.3 REDUCED FORM (INTENSITY) MODELS
3.4 INTENSITY MODELS: THE MULTINAME PICTURE
Part II: Pricing Counterparty Risk: Unilateral CVA
Chapter 4: Unilateral CVA and Netting for Interest Rate Products
4.1 FIRST STEPS TOWARDS A CVA PRICING FORMULA
4.2 THE PROBABILISTIC FRAMEWORK
4.3 THE GENERAL PRICING FORMULA FOR UNILATERAL COUNTERPARTY RISK
4.4 INTEREST RATE SWAP (IRS) PORTFOLIOS
4.5 NUMERICAL TESTS
4.6 CONCLUSIONS
Chapter 5: Wrong Way Risk (WWR) for Interest Rates
5.1 MODELLING ASSUMPTIONS
5.2 NUMERICAL METHODS
5.3 RESULTS AND DISCUSSION
5.4 CONTINGENT CDS (CCDS)
5.5 RESULTS INTERPRETATION AND CONCLUSIONS
Chapter 6: Unilateral CVA for Commodities with WWR
6.1 OIL SWAPS AND COUNTERPARTY RISK
6.2 MODELLING ASSUMPTIONS
6.3 FORWARD VERSUS FUTURES PRICES
6.4 SWAPS AND COUNTERPARTY RISK
6.5 UCVA FOR COMMODITY SWAPS
6.6 INADEQUACY OF BASEL’S WWR MULTIPLIERS
6.7 CONCLUSIONS
Chapter 7: Unilateral CVA for Credit with WWR
7.1 INTRODUCTION TO CDSs WITH COUNTERPARTY RISK
7.2 MODELLING ASSUMPTIONS
7.3 CDS OPTIONS EMBEDDED IN CVA PRICING
7.4 UCVA FOR CREDIT DEFAULT SWAPS: A CASE STUDY
7.5 CONCLUSIONS
Chapter 8: Unilateral CVA for Equity with WWR
8.1 COUNTERPARTY RISK FOR EQUITY WITHOUT A FULL HYBRID MODEL
8.2 COUNTERPARTY RISK WITH A HYBRID CREDIT-EQUITY STRUCTURAL MODEL
8.3 MODEL CALIBRATION AND EMPIRICAL RESULTS
8.4 COUNTERPARTY RISK AND WRONG WAY RISK
Chapter 9: Unilateral CVA for FX
9.1 PRICING WITH TWO CURRENCIES: FOUNDATIONS
9.2 UNILATERAL CVA FOR A FIXED-FIXED CCS
9.3 UNILATERAL CVA FOR CROSS CURRENCY SWAPS WITH FLOATING LEGS
9.4 WHY A CROSS CURRENCY BASIS?
9.5 CVA FOR CCS IN PRACTICE
9.6 NOVATIONS AND THE COST OF LIQUIDITY
9.7 CONCLUSIONS
Part III: Advanced Credit and Funding Risk Pricing
Chapter 10: New Generation Counterparty and Funding Risk Pricing
10.1 INTRODUCING THE ADVANCED PART OF THE BOOK
10.2 WHAT WE HAVE SEEN BEFORE: UNILATERAL CVA
10.3 UNILATERAL DEBIT VALUATION ADJUSTMENT (UDVA)
10.4 BILATERAL RISK AND DVA
10.5 UNDESIRABLE FEATURES OF DVA
10.6 CLOSE-OUT: RISK-FREE OR REPLACEMENT?
10.7 CAN WE NEGLECT THE FIRST-TO-DEFAULT TIME?
10.8 PAYOFF RISK
10.9 COLLATERALIZATION, GAP RISK AND RE-HYPOTHECATION
10.10 FUNDING COSTS
10.11 RESTRUCTURING COUNTERPARTY RISK
10.12 CONCLUSIONS
Chapter 11: A First Attack on Funding Cost Modelling
11.1 THE PROBLEM
11.2 A CLOSER LOOK AT FUNDING AND DISCOUNTING
11.3 THE APPROACH PROPOSED BY MORINI AND PRAMPOLINI (2010)
11.4 WHAT NEXT ON FUNDING?
Chapter 12: Bilateral CVA–DVA and Interest Rate Products
12.1 ARBITRAGE-FREE VALUATION OF BILATERAL COUNTERPARTY RISK
12.2 MODELLING ASSUMPTIONS
12.3 NUMERICAL METHODS
12.4 RESULTS AND DISCUSSION
12.5 CONCLUSIONS
Chapter 13: Collateral, Netting, Close-Out and Re-Hypothecation
13.1 TRADING UNDER THE ISDA MASTER AGREEMENT
13.2 BILATERAL CVA FORMULA UNDER COLLATERALIZATION
13.3 CLOSE-OUT AMOUNT EVALUATION
13.4 SPECIAL CASES OF COLLATERAL-INCLUSIVE BILATERAL CREDIT VALUATION ADJUSTMENT
13.5 EXAMPLE OF COLLATERALIZATION SCHEMES
13.6 CONCLUSIONS
Chapter 14: Close-Out and Contagion with Examples of a Simple Payoff
14.1 INTRODUCTION TO CLOSE-OUT MODELLING AND EARLIER WORK
14.2 CLASSICAL UNILATERAL AND BILATERAL VALUATION ADJUSTMENTS
14.3 BILATERAL ADJUSTMENT AND CLOSE-OUT: RISK-FREE OR REPLACEMENT?
14.4 A QUANTITATIVE ANALYSIS AND A NUMERICAL EXAMPLE
14.5 CONCLUSIONS
Chapter 15: Bilateral Collateralized CVA and DVA for Rates and Credit
15.1 CBVA FOR INTEREST RATE SWAPS
15.2 MODELLING CREDIT CONTAGION
15.3 CBVA FOR CREDIT DEFAULT SWAPS
15.4 CONCLUSIONS
Chapter 16: Including Margining Costs in Collateralized Contracts
16.1 TRADING UNDER THE ISDA MASTER AGREEMENT
16.2 CBVA GENERAL FORMULA WITH MARGINING COSTS
16.3 CHANGING THE COLLATERALIZATION CURRENCY
16.4 CONCLUSIONS
Chapter 17: Funding Valuation Adjustment (FVA)?
17.1 DEALING WITH COSTS OF FUNDING
17.2 COLLATERAL- AND FUNDING-INCLUSIVE BILATERAL VALUATION ADJUSTED PRICE
17.3 FUNDING RISK AND LIQUIDITY POLICIES
17.4 CBVA PRICING EQUATION WITH FUNDING COSTS (CFBVA)
17.5 DETAILED EXAMPLES
17.6 CONCLUSIONS: FVA AND BEYOND
Chapter 18: Non-Standard Asset Classes: Longevity Risk
18.1 INTRODUCTION TO LONGEVITY MARKETS
18.2 LONGEVITY SWAPS: THE PAYOFF Π
18.3 MARK-TO-MARKET FOR LONGEVITY SWAPS
18.4 COUNTERPARTY AND OWN DEFAULT RISK, COLLATERAL AND FUNDING
18.5 AN EXAMPLE OF MODELLING SPECIFICATION FROM BIFFIS ET AL. (2011)
18.6 DISCUSSION OF THE RESULTS IN BIFFIS ET AL. (2011)
Chapter 19: Conclusions and Further Work
19.1 A FINAL DIALOGUE: MODELS, REGULATIONS, CVA/DVA, FUNDING AND MORE
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