Research Catalog

Title

Counterparty risk and funding : a tale of two puzzles / Stéphane Crépey and Tomasz R. Bielecki ; with an introductory dialogue by Damiano Brigo.

Author

Crépey, Stéphane,

Publication

Boca Raton, FL : CRC Press, [2014]

Items in the Library & Off-site

Details

Additional Authors

• Bielecki, Tomasz R., 1955-
• Brigo, Damiano, 1966-

Description

xxi, 365 pages; 27 cm.

Summary

• "Preface Introduction The credit crisis and the ongoing European sovereign debt crisis have highlighted the native form of credit risk, namely counterparty risk. This is the risk of non-payment of promised cash flows due to the default of a party in an over the counter (OTC) derivative transaction. The value (price) of this risk has been initially called credit valuation adjustment (CVA), and the volatility of this value is of interest. A key related issue, especially with credit derivatives, is the so-called wrong way risk, i.e. the risk that occurs when exposure to a counterparty is adversely correlated with the credit quality of that counterparty. Moreover, as banks themselves have become risky, counterparty risk must be analyzed from the bilateral perspective: not only CVA needs to be accounted for, but also debt valuation adjustment (DVA), so that the counterparty risk of the two parties to the OTC contract are jointly accounted for in the modeling. In this context the classical assumption of a locally risk-free asset which is used for financing purposes (lending and borrowing as needed) is not sustainable anymore, which raises the companion issue of a proper accounting of the funding costs of a position (funding valuation adjustment (FVA), and liquidity valuation adjustment (LVA) when considered net of credit spread). The last related issue is that of replacement cost (RC) corresponding to the fact that at the default time of a party the valuation of the contract by the liquidator may differ from the economic value of the contract (cost of the hedge) right before that time"--Provided by publisher.
• "Solve the DVA/FVA Overlap Issue and Effectively Manage Portfolio Credit RiskCounterparty Risk and Funding: A Tale of Two Puzzles explains how to study risk embedded in financial transactions between the bank and its counterparty. The authors provide an analytical basis for the quantitative methodology of dynamic valuation, mitigation, and hedging of bilateral counterparty risk on over-the-counter (OTC) derivative contracts under funding constraints. They explore credit, debt, funding, liquidity, and rating valuation adjustment (CVA, DVA, FVA, LVA, and RVA) as well as replacement cost (RC), wrong-way risk, multiple funding curves, and collateral. The first part of the book assesses today's financial landscape, including the current multi-curve reality of financial markets. In mathematical but model-free terms, the second part describes all the basic elements of the pricing and hedging framework. Taking a more practical slant, the third part introduces a reduced-form modeling approach in which the risk of default of the two parties only shows up through their default intensities. The fourth part addresses counterparty risk on credit derivatives through dynamic copula models. In the fifth part, the authors present a credit migrations model that allows you to account for rating-dependent credit support annex (CSA) clauses. They also touch on nonlinear FVA computations in credit portfolio models. The final part covers classical tools from stochastic analysis and gives a brief introduction to the theory of Markov copulas.The credit crisis and ongoing European sovereign debt crisis have shown the importance of the proper assessment and management of counterparty risk. This book focuses on the interaction and possible overlap between DVA and FVA terms. It also explores the particularly challenging issue of counterparty risk in portfolio credit modeling. Primarily for researchers and graduate students in financial mathematics, the book is also suitable for financial quants, managers in banks, CVA desks, and members of supervisory bodies"--Provided by publisher.

Series Statement

Chapman & Hall/CRC financial mathematics series

Uniform Title

Chapman & Hall/CRC financial mathematics series.

Subject

• BUSINESS & ECONOMICS / Finance
• Credit > Mathematical models
• Credit derivatives > Mathematical models
• Finance > Mathematical models
• Financial risk > Mathematical models
• MATHEMATICS / General
• MATHEMATICS / Probability & Statistics / General

Note

• "A Chapman & Hall Book".

Bibliography (note)

• Includes bibliographical references and index.

ISBN

• 9781466516458 (hardback)
• 1466516453 (hardback)

LCCN

• 2014003733
• 99961325247

Owning Institutions

Columbia University Libraries