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Counterparty Credit Risk and Credit Value Adjustment A Continuing Challenge for Global Financial Markets

ISBN-10: 1118316673
ISBN-13: 9781118316672
Edition: 2nd 2012
Authors: Jon Gregory
List price: $126.95
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Description: The first decade of the 21st Century has been disastrous for financial institutions, derivatives and risk management. Counterparty credit risk has become the key element of financial risk management, highlighted by the bankruptcy of the investment  More...

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Book details

List price: $126.95
Edition: 2nd
Copyright year: 2012
Publisher: John Wiley & Sons, Limited
Publication date: 8/24/2012
Binding: Hardcover
Pages: 480
Size: 7.00" wide x 10.00" long x 1.25" tall
Weight: 1.276

The first decade of the 21st Century has been disastrous for financial institutions, derivatives and risk management. Counterparty credit risk has become the key element of financial risk management, highlighted by the bankruptcy of the investment bank Lehman Brothers and failure of other high profile institutions such as Bear Sterns, AIG, Fannie Mae and Freddie Mac. The sudden realisation of extensive counterparty risks has severely compromised the health of global financial markets. Counterparty risk is now a key problem for all financial institutions.This book explains the emergence of counterparty risk during the recent credit crisis. The quantification of firm-wide credit exposure for trading desks and businesses is discussed alongside risk mitigation methods such as netting and collateral management (margining) and central counterparties. Banks and other financial institutions have been recently developing their capabilities for pricing counterparty risk and these elements are considered in detail via a characterisation of credit value adjustment (CVA). The implications of an institution valuing their own default via debt value adjustment (DVA) and funding costs (FVA) are also considered at length. Portfolio management and hedging of CVA are described in full. Wrong–way counterparty risks are addressed in detail in relation to interest rate, foreign exchange, commodity and credit derivative products. Regulatory capital for counterparty risk, including the recent Basel III requirements for CVA VAR is discussed. The management of counterparty risk within an institution by a “CVA desk” is also discussed in detail. Finally, the design and benefits of central clearing, a recent development to attempt to control the rapid growth of counterparty risk, is considered. Hedging aspects, together with the associated instruments such as credit defaults swaps (CDSs) and contingent CDS (CCDS) are described in full.This book is unique in being practically focused but also covering the more technical aspects. It is an invaluable complete reference guide for any market practitioner, policy maker, academic or student with any responsibility or interest within the area of counterparty credit risk and CVA.

Introduction
Introduction
Background
Introduction
Financial risk
Value-at-risk
The derivatives market
Counterparty risk in context
Summary
Defining Counterparty Credit Risk
Introducing counterparty credit risk
Components and terminology
Control and quantification
Summary
Mitigation Of Counterparty Credit Risk
Netting, Compression, Resets and Termination Features
Introduction
Netting
Termination features and trade compression
Conclusion
Collateral
Introduction
Collateral terms
Defining the amount of collateral
The risks of collateralisation
Summary
Default Remote Entities and the Too Big to Fail Problem
Introduction
Special purpose vehicles
Derivative product companies
Monolines and credit DPCs
Central counterparties
Central Counterparties
Centralised clearing
Logistics of central clearing
Analysis of the impact and benefits of CCPs
Conclusions
Credit Exposure
Credit exposure
Metrics for credit exposure
Factors driving credit exposure
Understanding the impact of netting on exposure
Credit exposure and collateral
Risk-neutral or real-world?
Summary
Credit Value Adjustment
Quantifying Credit Exposure
Introduction
Methods for quantifying credit exposure
Monte Carlo methodology
Models for credit exposure
Netting examples
Allocating exposure
Exposure and collateral
Summary
Default Probability, Credit Spreads and Credit Derivatives
Default probability and recovery rates
Credit default swaps
Curve mapping
Portfolio credit derivatives
Summary
Portfolio Counterparty Credit Risk
Introduction
Double default
Credit portfolio losses
Summary
Credit Value Adjustment
Definition of CVA
CVA and exposure
Impact of default probability and recovery
Pricing new trades using CVA
CVA with collateral
Summary
Debt Value Adjustment
DVA and counterparty risk
The DVA controversy
How to monetise DVA
Further DVA considerations
Summary
Funding and Valuation
Background
OIS discounting
Funding value adjustment
Optimisation of CVA, DVA and funding costs
Future trends
Summary
Wrong-Way Risk
Introduction
Overview of wrong-way risk
Portfolio wrong-way risk
Trade-level wrong-way risk
Wrong-way risk and credit derivatives
Summary
Managing Counterparty Credit Risk
Hedging Counterparty Risk
Background to CVA hedging
Component of CVA hedging
Exposure hedges
Credit hedges
Cross-dependency
The impact of DVA and collateral
Summary
Regulation and Capital Requirements
Introduction
Basel II
Exposure under Basel II
Basel III
Central counterparties
Summary
Managing CVA - The "CVA Desk"
Introduction
The role of a CVA desk
CVA charging
Technology
Practical hedging of CVA
Summary
The Future of Counterparty Risk
Key components
Key axes of development
The continuing challenge for global financial markets
References
Index

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