Rational Multi-Curve Models with Counterparty-Risk Valuation Adjustments
We develop a multi-curve term structure setup in which the modelling ingredients are expressed by rational functionals of Markov processes. We calibrate to LIBOR swaptions data and show that a rational two-factor lognormal multi-curve model is sufficient to match market data with accuracy. We elucidate the relationship between the models developed and calibrated under a risk-neutral measure Q and their consistent equivalence class under the real-world probability measure P. The consistent P-pricing models are applied to compute the risk exposures which may be required to comply with regulatory obligations. In order to compute counterparty-risk valuation adjustments, such as CVA, we show how positive default intensity processes with rational form can be derived. We flesh out our study by applying the results to a basis swap contract.
Code (0)
등록된 구현이 없습니다.
Similar Papers 제목 키워드 기반
Liability-side Pricing of Swaps and Coherent CVA and FVA by Regression/Simulation
An uncollateralized swap hedged back-to-back by a CCP swap is used to introduce FVA. The open IR01 of FVA, however, is a sure sign of risk not being fully hedged, a theoretical no-arbitrage pricing concern, and a bait to…
regressionCoherent CVA and FVA with Liability Side Pricing of Derivatives
This article presents FVA and CVA of a bilateral derivative in a coherent manner, based on recent developments in fair value accounting and ISDA standards. We argue that a derivative liability, after primary risk factors…
Pricing Derivatives with Counterparty Risk and Collateralization: A Fixed Point Approach
This paper studies a valuation framework for financial contracts subject to reference and counterparty default risks with collateralization requirement. We propose a fixed point approach to analyze the mark-to-market con…
Gaussian Process Regression for Derivative Portfolio Modeling and Application to CVA Computations
Modeling counterparty risk is computationally challenging because it requires the simultaneous evaluation of all the trades with each counterparty under both market and credit risk. We present a multi-Gaussian process re…
regressionAn Enhanced Initial Margin Methodology to Manage Warehoused Credit Risk
The use of CVA to cover credit risk is widely spread, but has its limitations. Namely, dealers face the problem of the illiquidity of instruments used for hedging it, hence forced to warehouse credit risk. As a result, d…