Read e-book online The XVA of Financial Derivatives: CVA, DVA and FVA Explained PDF

By Dongsheng Lu

ISBN-10: 1137435836

ISBN-13: 9781137435835

ISBN-10: 1137435844

ISBN-13: 9781137435842

This most up-to-date addition to the monetary Engineering defined sequence makes a speciality of the hot criteria for derivatives valuation, particularly, pricing and danger administration making an allowance for counterparty hazard, and the XVA's credits, investment and Debt worth adjustments.

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The XVA of Financial Derivatives: CVA, DVA and FVA Explained by Dongsheng Lu PDF

This newest addition to the monetary Engineering defined sequence makes a speciality of the recent criteria for derivatives valuation, particularly, pricing and probability administration making an allowance for counterparty probability, and the XVA's credits, investment and Debt price changes.

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Additional resources for The XVA of Financial Derivatives: CVA, DVA and FVA Explained

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At the occurrence of the reference credit event, the CDS seller will fulfill the obligation to provide the credit protection. For example, if the reference entity is a bond, the CDS buyer may deliver the bond to the CDS seller and the CDS seller will pay the par value of the bond. The size of CDS spread is one of the cleanest indicators for credit entity default probabilities as viewed by the market.

With the reduction of credit risk, the trading counterparties are able to do more business with each other within a defined credit risk limit. The type of collateral is specifically defined in the CSA, including the collateral currencies, collateral assets and haircuts. The CSA also defines whether the collateral can be rehypothecated or not. Rehypothecation is the market practice whereby a counterparty can reuse the security pledged as collateral for its own use. Rehypothecation allows the lender to use the pledged collateral in its own funding activities, such as deploying in the repo market, or pledging to others for its own trades and borrowings.

For example: • Trade Specific Break Clause For the purpose of reducing credit risk, mutual put breaks are sometimes included in confirmations, which can be exercised for a specified frequency. These mutual options are discretionary and can be exercised by either party. Mutual put breaks are clearly important credit mitigants for both trading parties, and are important components in CVA and Risk Weighted Asset (RWA) calculations. As the banks become more and more sensitive to the capital related requirements, mutual put exercises have become increasingly popular over the past a few years.

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The XVA of Financial Derivatives: CVA, DVA and FVA Explained by Dongsheng Lu


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