Counterparty Credit Risk and Credit Value Adjustment A Continuing Challenge for Global Financial Markets, 2nd Edition

SECTION I INTRODUCTION

1 Introduction

2 Background

2.1 Introduction

2.2 Financial risk

2.3 Value-at-risk

2.4 The derivatives market

2.5 Counterparty risk in context

2.6 Summary

3 Defining Counterparty Credit Risk

3.1 Introducing counterparty credit risk

3.2 Components and terminology

3.3 Control and quantification

3.4 Summary

SECTION II MITIGATION OF COUNTERPARTY CREDIT RISK

4 Netting, Compression, Resets and Termination Features

4.1 Introduction

4.2 Netting

4.3 Termination features and trade compression

4.4 Conclusion

5 Collateral

5.1 Introduction

5.2 Collateral terms

5.3 Defining the amount of collateral

5.4 The risks of collateralisation

5.5 Summary

6 Default Remote Entities and the Too Big to Fail Problem

6.1 Introduction

6.2 Special purpose vehicles

6.3 Derivative product companies

6.4 Monolines and credit DPCs

6.5 Central counterparties

7 Central Counterparties

7.1 Centralised clearing

7.2 Logistics of central clearing

7.3 Analysis of the impact and benefits of CCPs

7.4 Conclusions

8 Credit Exposure

8.1 Credit exposure

8.2 Metrics for credit exposure

8.3 Factors driving credit exposure

8.4 Understanding the impact of netting on exposure

8.5 Credit exposure and collateral

8.6 Risk-neutral or real-world?

8.7 Summary

SECTION III CREDIT VALUE ADJUSTMENT

9 Quantifying Credit Exposure

9.1 Introduction

9.2 Methods for quantifying credit exposure

9.3 Monte Carlo methodology

9.4 Models for credit exposure

9.5 Netting examples

9.6 Allocating exposure

9.7 Exposure and collateral

9.8 Summary

10 Default Probability, Credit Spreads and Credit Derivatives

10.1 Default probability and recovery rates

10.2 Credit default swaps

10.3 Curve mapping

10.4 Portfolio credit derivatives

10.5 Summary

11 Portfolio Counterparty Credit Risk

11.1 Introduction

11.2 Double default

11.3 Credit portfolio losses

11.4 Summary

12 Credit Value Adjustment

12.1 Definition of CVA

12.2 CVA and exposure

12.3 Impact of default probability and recovery

12.4 Pricing new trades using CVA

12.5 CVA with collateral

12.6 Summary

13 Debt Value Adjustment

13.1 DVA and counterparty risk

13.2 The DVA controversy

13.3 How to monetise DVA

13.4 Further DVA considerations

13.5 Summary

14 Funding and Valuation

14.1 Background

14.2 OIS discounting

14.3 Funding value adjustment

14.4 Optimisation of CVA, DVA and funding costs

14.5 Future trends

14.6 Summary

15 Wrong-Way Risk

15.1 Introduction

15.2 Overview of wrong-way risk

15.3 Portfolio wrong-way risk

15.4 Trade-level wrong-way risk

15.5 Wrong-way risk and credit derivatives

15.6 Summary

SECTION IV MANAGING COUNTERPARTY CREDIT RISK

16 Hedging Counterparty Risk

16.1 Background to CVA hedging

16.2 Component of CVA hedging

16.3 Exposure hedges

16.4 Credit hedges

16.5 Cross-dependency

16.6 The impact of DVA and collateral

16.7 Summary

17 Regulation and Capital Requirements

17.1 Introduction

17.2 Basel II

17.3 Exposure under Basel II

17.4 Basel III

17.5 Central counterparties

17.6 Summary

18 Managing CVA – The “CVA Desk”

18.1 Introduction

18.2 The role of a CVA desk

18.3 CVA charging

18.4 Technology

18.5 Practical hedging of CVA

18.6 Summary

19 The Future of Counterparty Risk

19.1 Key components

19.2 Key axes of development

19.3 The continuing challenge for global financial markets

References

Index