Roland Lichters, Roland Stamm, Donal Gallagher

Modern Derivatives Pricing and Credit Exposure Analysis (eBook, PDF)

Theory and Practice of CSA and XVA Pricing, Exposure Simulation and Backtesting

• Format: PDF

Produktbeschreibung

Produktdetails

• Verlag: Palgrave Macmillan UK
• Erscheinungstermin: 15. November 2015
• Englisch
• ISBN-13: 9781137494849
• Artikelnr.: 44902696

Autorenporträt

Inhaltsangabe

Contents
Preface
Acknowledgments
PART 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 ChangedWith 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 Specialties
3.5 Building the Forward Projection Curves
3.6 More USD Specialties
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
6.1 Introduction
6.2 Hedge Effectiveness
6.3 Single-Curve Valuation
6.4 Multi-Curve Valuation
PART 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
PART III: RISK FACTOR EVOLUTION
10 A Monte Carlo Framework
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
12.1 Cross-Currency LGM
12.2 Multi-Currency LGM
12.3 Calibration
12.3.1 Interest Rate Processes
12.3.2 FX Processes
12.3.3 Correlations
12.4 Cross-Currency Basis
12.5 Exposure Evolution Examples
13 Inflation
13.1 Products
13.2 Jarrow-Yildirim Model
13.2.1 Calibration
13.2.2 Foreign Currency Inflation
13.3 Dodgson-Kainth Model
13.3.1 Calibration
13.3.2 Foreign Currency Inflation
13.4 Seasonality
13.5 Exposure Evolution Examples
14 Equity and Commodity
14.1 Equity
14.2 Commodity
15 Credit
15.1 Market
15.2 Gaussian Model
15.2.1 Conclusion
15.3 Cox-Ingersoll-Ross Model
15.3.1 CIR without Jumps
15.3.2 Relaxed Feller Constraint
15.3.3 CDS Spread Distribution
15.3.4 CIR with Jumps: JCIR
15.3.5 JCIR Extension
15.3.6 Examples: CDS CVA and Wrong-Way Risk
15.3.7 Conclusion
15.4 Black-Karasinski Model
15.5 Peng-Kou Model
15.5.1 Review CDS and CDS Option
15.5.2 Compound Poisson Process
15.5.3 Compound Polya Process
15.5.4 Examples
15.5.5 Conclusion
PART IV: XVA 251
16 Cross-Asset Scenario Generation
16.1 Expectations and Covariances
16.2 Path Generation
16.3 Pseudo Random vs Low Discrepancy Sequences
16.4 Long-Term Interest Rate Simulation
17 Netting and Collateral
17.1 Netting
17.1.1 Non-netted Counterparty Exposures
17.1.2 Netting Set Exposures
17.1.3 Generalized Counterparty Exposures
17.2 Collateralization
17.2.1 Collateralized Netting Set Exposure
17.2.2 CSA Margining
17.2.3 Margin Settlement
17.2.4 Interest Accrual
17.2.5 FX Risk
17.2.6 Collateral Choice
18 Early Exercise and American Monte Carlo
18.1 American Monte Carlo
18.2 Utilizing American Monte Carlo for CVA
19 CVA Risk and Algorithmic Differentiation
19.1 Algorithmic Differentiation
19.2 AD Basics
19.3 AD Examples
19.3.1 Vanilla Swap and Interest Rate Sensitivities
19.3.2 European Swaptions with Deltas and Vega Cube
19.4 Further Applications of AD
20 FVA
20.1 A Simple Definition of FVA
20.2 DVA = FBA?
20.3 The Role of the Spreads
20.4 The Expectation Approach
20.5 The Semi-Replication Approach
20.6 MVA
20.7 Outlook
21 KVA 325
21.1 KVA by Semi-Replication
21.2 Calculation of KVA
21.3 Risk-Warehousing and TVA
PART V: CREDIT RISK
22 Introduction
22.1 Fundamentals
22.2 Portfolio Credit Models
22.2.1 Independent Defaults
22.2.2 Static Default Correlation Modelling
22.2.3 Dynamic Default Correlation Modelling
22.3 Industry Portfolio Credit Models
23 Pricing Portfolio Credit Products
23.1 Introduction
23.2 Synthetic Portfolio Credit Derivatives
23.2.1 Nth-to-Default Basket
23.2.2 Synthetic Collateralized Debt Obligation
23.2.3 Synthetic CDO2
23.3 Cashflow Structures
23.3.1 Introduction
23.3.2 Cashflow CDO Structures
23.3.3 Overall Pricing Framework
23.3.4 Pricing Formulas
23.4 Example Results
23.4.1 Test Deal
23.4.2 Test Results
23.4.3 Discussion of Results
24 Credit Risk for Derivatives
24.1 Introduction
24.2 Potential Future Exposure
24.3 Real-World Measure
24.3.1 Traditional Approach
24.3.2 Adjusted Risk-Neutral Approach
24.3.3 Joint Measure Model Approach
24.4 Standardized Approach, CEM and SA-CCR
24.4.1 Current Standardized Approach: CEM
24.4.2 New Standardized Approach: SA-CCR
24.5 Basel Internal Model Approach
24.6 Capital Requirements for Centrally Cleared Derivatives
24.7 CVA Capital Charge
24.7.1 The Standard Approach
24.7.2 The IMM Approach
24.7.3 Mitigation of the CVA Capital Charge
24.7.4 Basel Exposure Measures
24.7.5 Exemptions
25 Backtesting
25.1 Introduction
25.2 Backtest Model Framework
25.2.1 Example: Anderson-Darling Test
25.3 RFE Backtesting
25.3.1 Creating the Sample Distance and Sampling Distribution
25.3.2 Example I: Risk-Neutral LGM
25.3.3 Example II: Risk-Neutral LGM with Drift Adjustment
25.4 Portfolio Backtesting
25.5 Outlook
PART VI: APPENDIX
A The Change of Numeraire Toolkit
B The Feynman-Kac Connection
C The Black76 Formula
C.1 The Standard Black76 Formula
C.2 The Normal Black76 Formula
D Hull-White Model
D.1 Summary
D.2 Bank Account and Forward Measure
D.3 Cross-Currency Hull-White Model
E Linear Gauss Markov Model
E.1 One-Factor
E.2 Two Factors
E.3 Cross Currency LGM
F Dodgson Kainth Model
F.1 Domestic Currency Inflation
F.2 Foreign Currency Inflation
G CIR Model with Jumps
H Filtration Switching and the PK Model
Bibliography
Index

Rezensionen

'The authors are established practitioners with many years of quant development and implementation experience in leading financial institutions. This is well reflected in the present book, rich with useful examples and covering highly relevant topics such as (among many others) real world RFE models and backtesting, normally left out by the main-stream financial literature.'

-Fabrizio Anfuso, Head of Collateralized Exposure Modelling, Credit Suisse; Visiting Lecturer, ETH Zurich and Bocconi University Milan

"The authors have achieved a matchless combination of theoretical and most importantly, practical expertise to this book. The work is complete, insightful and exact and is suitable for all professionals dealing with XVA expert and novice alike."

-Jörg Kienitz, Director and Co-Lead Quant Unit and Adjunct Associate Professor University of Cape Town

'Modern Derivatives Pricing and Credit Exposure Analysis by Lichters, Stamm and Gallagher (with whom I have collaborated) has unique strengths. There are three chapters developing discounting from a CCP point of view, a global view and a CSA-based view. There is a fully worked out multi-asset framework based on the Linear Gaussian Model (LGM) with particular depth on inflation with both Jarrow-Yildrim and Dodgson-Kainth models. It provides a forensically detailed analysis of credit processes, mapping their limitations and highlights directions that avoid them (developed in detail from thePeng-Kou approach). The XVA coverage starts with CVA/DVA and is followed by separate chapters on FVA and KVA. The usual limitations for such a comprehensive book are present, e.g. limited treatment of smile modelling in a multi-curve setup (worth a book by itself), and limited coverage of the trade-offs in XVA between the costs of hedging risks and the (capital and modelling) costs of open risks (often forced by credit market limitations). Overall, this is a thorough and practical introduction to modern derivatives pricing."

-Chris Kenyon, front office quant; author of 10 papers in the Cutting Edge section in Risk