An XVA Approach to Counterparty Risk Appraisal

(E-pub Ahead of Print)

Author(s): Junhao Zhu, Dejun Xie, Gang Liu, Fei Ma*

Journal Name: Current Chinese Computer Science

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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.

Keywords: Counterparty risk, CVA, DVA, FVA, KVA.

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(E-pub Ahead of Print)
DOI: 10.2174/2665997201999200909124001

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