Course description
This course explains and describes the valuation adjustments (‘xVAs’) in pricing and valuation in relation to counterparty credit risk, collateral, funding, capital and initial margin. The concepts are built up sequentially and workshops are used to develop the key ideas including simulation of exposure, the impact of risk mitigants, collateral effects, regulation and the resulting calculation of CVA, DVA, FVA, ColVA, KVA and MVA.
During the programme, participants will examine the impact of accounting requirements (IFRS 13, FASB 157) on valuation adjustments and the IHS Markit Totem xVA consensus pricing. The programme will also address regulatory capital rules in detail – with the impact of the CVA capital charge and future changes such as SA-CCR, SA-CVA, FRTB and the leverage ratio. Funding, including the impact of the LCR and NSFR liquidity requirements for banks, is comprehensively discussed. The impact of initial margin via mandatory central clearing and the uncleared margin rules (UMR) are fully assessed. Initial margin methodologies at CCPs and in bilateral markets (SIMM) are also described.
The portfolio nature of xVA and links between different terms is considered in detail. xVA implementation and hedging will also be discussed, with particular attention being paid to current market approaches and best practice – areas where a clear consensus has not yet emerged or where there may be changes in the future will be highlighted and discussed. Current hot topics – such as funding assumptions, return on capital and the treatment of initial margin – will also be explored.
Participants will be able to take away all worked examples and additional exercises and models implemented using Excel functions and macros. They will also receive the latest edition of Jon's book "The xVA Challenge: Counterparty Risk, Funding, Collateral, Capital and Initial Margin" published by Wiley Finance.
The programme is divided into three distinct topics:
- Basics and Counterparty Credit Risk
- Credit and Funding (CVA/FVA)
- Capital and Initial Margin (KVA/MVA)
Upcoming start dates
Training content
Day One
Basics and CCR Introduction
- Overview and historical background
- The impact of regulation and accounting
- The importance of capital and funding costs
- What is xVA?
Counterparty credit risk
- Credit exposure
- Credit limits and PFE
- EFV, EPE and ENE
- Incremental and marginal exposure
Example: PFE example
Mitigating Counterparty Risk
- Netting and compression
- Resets and ATEs
- Collateral
- Initial margin
- Central counterparties
Example: Compression example
Day Two
Collateral, Exposure and CVA Collateral and discounting
- Variation margin and collateral discounting
- Cheapest-to-deliver valuation
- Discounting to ColVA
- Funding and discounting
Example: ColVA calculation
Exposure simulation
- Challenges of exposure simulation
- Models and calibration for each asset class
- Proxies and correlations
- Implementation with Monte Carlo
- Modelling resets and collateral
Example: FX forward and IRS simulation
CVA and DVA
- Proxy spread approaches
- CVA formulas
- Impact of collateral on CVA
- Wrong-way risk
- Bilateral CVA
Example: CVA/DVA calculation
Day Three
Funding and Capital Funding and FVA
- NSFR and LCR and IBOR replacement
- FVA formula and link to discounting approach
- Capturing one-way CSAs
- CVA/DVA/FVA framework
- Asymmetric FVA
Example: FVA calculation
Managing and Hedging xVA
- Bank approaches to hedging xVA
- xVA greeks
- Hedging instruments
- P&L explained
- Proxy hedging
Example: xVA hedging simulations
Regulatory capital requirements
- Counterparty risk capital requirements
- Cleared vs. non cleared capital requirements
- Review of capital methodologies
- SA-CCR
- The leverage ratio
Example: SA-CCR vs. IMM
Day Four
KVA and Initial Margin Capital and KVA
- Return on capital in banks
- Capital value adjustment (KVA)
- KVA management strategies
- Initial margin in SA-CCR and IMM approaches
- FRTB and BA-CVA / SA-CVA
Example: KVA calculation
Initial Margin and MVA
- Bilateral margin rules
- CCP initial margin methodologies
- The ISDA SIMM™
- MVA
- Initial margin optimisation
Example: SIMM and MVA calculations
Recap and advanced topics
- Overlaps and portfolio effects
- xVA examples under different CSAs
- xVA optimisation
- Wrong-way risk
- Asymmetric FVA
- Approach to capital and KVA
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London Financial Studies - Capital Markets Executive Education in the USA
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