Innovations in Derivatives Markets: Fixed Income Modeling, by Kathrin Glau, Zorana Grbac, Matthias Scherer, Rudi Zagst

By Kathrin Glau, Zorana Grbac, Matthias Scherer, Rudi Zagst

This booklet offers 20 peer-reviewed chapters on present facets of derivatives markets and by-product pricing. The contributions, written by way of major researchers within the box in addition to skilled authors from the monetary undefined, current the state-of-the-art in:

• Modeling counterparty credits possibility: credits valuation adjustment, debit valuation adjustment, investment valuation adjustment, and opposite direction risk.

• Pricing and hedging in fixed-income markets and multi-curve interest-rate modeling.

• fresh advancements bearing on contingent convertible bonds, the measuring of foundation spreads, and the modeling of implied correlations.

The fresh monetary trouble has solid super doubts at the classical view on spinoff pricing. Now, counterparty credits possibility and liquidity matters are vital points of a prudent valuation technique and the reference rates of interest are represented through a large number of curves in response to their varied classes and maturities.

A panel dialogue integrated within the publication (featuring Damiano Brigo, Christian Fries, John Hull, and Daniel Sommer) at the foundations of modeling and pricing within the presence of counterparty credits hazard presents fascinating insights at the debate.

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Extra info for Innovations in Derivatives Markets: Fixed Income Modeling, Valuation Adjustments, Risk Management, and Regulation

Example text

Com, Collateral (2011) 34. : Funding, collateral and hedging: uncovering the mechanics and the subtleties of funding valuation adjustments. 3811 (2012) 35. : The isda master agreement and csa: close-out weaknesses exposed in the banking crisis and suggestions for change. Butterworths J. Int. Bank. Law 1 (2009) 36. : Funding beyond discounting: collateral agreements and derivatives pricing. Risk Mag. 2, 97–102 (2010) 37. : A Journey into the Dark Arts of Quantitative Finance. Aarhus University, Department of Economics and Business (2013) 38.

A further simplification in Vˆ could be to neglect the first-to-default check in the close-out. We have the following definition Definition 1 (Nonlinearity Valuation Adjustment, NVA) NVA is defined as NVAt V¯t − Vˆt where V¯ denotes the full nonlinear deal value while Vˆ denotes an approximate linearized price of the deal. 02 Funding spread Fig. 01 As an illustration, we revisit the above example of an equity call option and analyze the NVA in a number of cases. The results are reported in Figs.

Theorem 3 decomposes the deal price V¯ into three intuitive terms. The first term is the value of the deal cash flows, discounted at the funding rate plus credit. The second term is the price of the on-default cash-flow in excess of the collateral, which includes the CVA and DVA of the deal after collateralization. The last term collects the cost of collateralization. At this point it is very important to appreciate once again that f˜ depends on F, and hence on V . Remark 2 (Deal-dependent Valuation Measure, Local Risk-neutral Measures).

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