Valuation of contracts with counterparty and funding risk under netting and collateral agreements
File(s)
Author(s)
Durand, Cyril
Type
Thesis
Abstract
In this Thesis we try to contribute to the debate on how to evaluate and manage counterparty credit
and funding risks.
• Chapter 1 examines the issue of taking into account alternative settlement conventions as well
as systemic risk in the assessment of Credit Valuation Adjustment. It is essentially a very close
version of the article co-wrote with Professor Marek Rutkowski (Sydney University) on the subject,
which was published in the International Journal of Theoretical and Applied Finance (IJTAF) in
November 2013.
• Chapter 2 aims at studying funding costs from an actuarial perspective, i.e. when funding risks
cannot be totally hedged. A related article was co-wrote with Professor Damiano Brigo and can
be found on line at www.arxiv.com (see [17]).
• Chapter 3 examines a problem commonly faced by practitioners when resorting to log-normal
instantaneous interest rate models, namely the risk that they take unrealistically high values,
which renders difficult their application to CVA and FVA management. Again, the content of this
Chapter can be found under a slightly different set-up as a stand alone article at www.ssrn.com.
• Chapter 4 details a Heston 2 Factors affine HJM model in the context of CVA and FVA manage-
ment, especially volatility wrong way risk, of equity/interest rate hybrid instruments as well as
equity instruments with long maturity.
• Chapter 5 brings together some considerations on recent ’hot subjects’ from a counterparty valua-
tion risk and regulatory point of view, more specifically how to compute collateral cost in a unified
setting with CVA and FVA, as well as the challenges imposed by the Non Modellable Risk Factors
guidelines on the CVA Fundamental Review of the Trading Book (CVA-FRTB) risk measures as
well as XVA valuations such as LVA and KVA.
and funding risks.
• Chapter 1 examines the issue of taking into account alternative settlement conventions as well
as systemic risk in the assessment of Credit Valuation Adjustment. It is essentially a very close
version of the article co-wrote with Professor Marek Rutkowski (Sydney University) on the subject,
which was published in the International Journal of Theoretical and Applied Finance (IJTAF) in
November 2013.
• Chapter 2 aims at studying funding costs from an actuarial perspective, i.e. when funding risks
cannot be totally hedged. A related article was co-wrote with Professor Damiano Brigo and can
be found on line at www.arxiv.com (see [17]).
• Chapter 3 examines a problem commonly faced by practitioners when resorting to log-normal
instantaneous interest rate models, namely the risk that they take unrealistically high values,
which renders difficult their application to CVA and FVA management. Again, the content of this
Chapter can be found under a slightly different set-up as a stand alone article at www.ssrn.com.
• Chapter 4 details a Heston 2 Factors affine HJM model in the context of CVA and FVA manage-
ment, especially volatility wrong way risk, of equity/interest rate hybrid instruments as well as
equity instruments with long maturity.
• Chapter 5 brings together some considerations on recent ’hot subjects’ from a counterparty valua-
tion risk and regulatory point of view, more specifically how to compute collateral cost in a unified
setting with CVA and FVA, as well as the challenges imposed by the Non Modellable Risk Factors
guidelines on the CVA Fundamental Review of the Trading Book (CVA-FRTB) risk measures as
well as XVA valuations such as LVA and KVA.
Version
Open Access
Date Issued
2018-02
Date Awarded
2018-11
Advisor
Brigo, Damiano
Publisher Department
Mathematics
Publisher Institution
Imperial College London
Qualification Level
Doctoral
Qualification Name
Doctor of Philosophy (PhD)