Title:An XVA Approach to Counterparty Risk Appraisal
VOLUME: 1
Author(s):Junhao Zhu, Dejun Xie, Gang Liu and Fei Ma*
Affiliation:Department of Mathematical Sciences, Xi'an Jiaotong-Liverpool University, Suzhou 215123, Department of Mathematical Sciences, Xi'an Jiaotong-Liverpool University, Suzhou 215123, Department of Mathematical Sciences, Xi'an Jiaotong-Liverpool University, Suzhou 215123, Department of Mathematical Sciences, Xi'an Jiaotong-Liverpool University, Suzhou 215123
Keywords: Counterparty risk, CVA, DVA, FVA, KVA.
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
world-wide fiscal crisis. The most notable measures include DVA, CVA and FVA.
Methods: This paper advocates the application of 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 advices are provided for real industry application of XVA.
Conclusion: Compared to traditional risk management in 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 financial operation point of view.
