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An XVA Approach to Counterparty Risk Appraisal
- Source: Current Chinese Computer Science, Volume 1, Issue 1, Apr 2021, p. 35 - 41
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- 24 May 2020
- 05 Aug 2020
- 01 Apr 2021
Abstract
Background: More bona fide adjustments aimed at appraising counterparty risks and financial expenses related to over-the-counter derivative have become indispensable after the European sovereign debt catastrophe and the 2007/08’s worldwide fiscal crisis. The most notable measures include DVA, CVA, and FVA.
Methods: This paper advocates the application of the XVA scheme to assess CVA, DVA, and FVA for managing risk and pricing of financial or OTC derivatives.
Results and Discussion: A foundation formula is formulated and tested against different risk scenarios of CVA, DVA, FVA, and KVA using cross-referenced data. Practical pieces of advice are provided for the real industry application of XVA.
Conclusion: Compared to traditional risk management in the financial market where funding risk, credit risk, and default risk are accounted separately, the approach proposed by the current study monitors the multiple types of risk in a comprehensive framework and is more practically effective from a financial operation point of view.