XVA. Green Andrew

to in terms of RWA or Risk-Weighted Assets as this is the regulatory asset value against which the capital must be held. In reality the Basel framework is written partially in terms of RWA and partly in terms of direct capital requirements but RWA is frequently used in finance as a shorthand way of describing all capital requirements.

10

OIS discounting models are discussed in Chapter 9.

11

The regulatory EAD is a separate but related quantity that I will discuss later in Chapter 12.

12

Or sometimes simply expected exposure (EE), although this can be confused with the forward value V_t which is sometimes also known as expected exposure.

13

is the filtration to time t. This is a technical element of stochastic calculus and the filtration simply represents all information such as asset prices up to time t. Where necessary I will include technical elements like this but they will be left out where appropriate and when it simplifies the presentation.

14

The specification of the recovery as a percentage of price is the most common approach but other specifications are possible, see Schönbucher (2003).

15

International Swaps and Derivatives Association.

16

A reverse repo is the opposite transaction where one counterparty buys bonds and agrees to sell them again at a fixed price at an agreed date in the future (see Figure 2.3). Hence each repo transaction is paired with a reverse repo for the counterparty.

17

This is significant in the context of funding valuation adjustment which will be discussed in Chapter 9.

18

Note that it is important to distinguish CCPs from exchanges. An exchange is a venue for the trading of commoditised derivative contracts that are in general liquid. Exchange-traded derivatives are supported by variation and initial margin and make use of clearing houses. A CCP is a venue for clearing standard derivatives that would otherwise have been traded bilaterally. They are not multiparty trading venues in the same sense as an exchange.

19

Now called LCH.Clearnet following the merger of the London Clearing House with the French Clearnet in 2003 (LCH, 2012c).

20

Optional breaks are often colloquially referred to as mutual breaks because of the bilateral nature of the option to break in most cases.

21

Technically this allows the filtration

to be factored into two components

associated with default risk and

corresponding to market state variables so that

. This assumption is standard in CVA approaches but will be relaxed in Chapter 7.

22

The integral in equation (3.12) could be approximated numerically in other ways such as via the trapezium rule.