Closing Out the DVA Debate

Gregory, Jon; German, Ilya

doi:10.2139/ssrn.2790204

Cited by 5 publications

(4 citation statements)

References 2 publications

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“…Concerning the debate on the controversial meaning of DVA, which can be realized only given one's own default, see for exampleGregory and German (2012).…”

mentioning

confidence: 99%

Counterparty credit risk in a multivariate structural model with jumps

Ballotta¹,

Fusai²

2015

Finance

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We present a multivariate version of a structural default model with jumps and use it in order to quantify the bilateral credit value adjustment and the bilateral debt value adjustment for equity contracts, such as forwards, in a Merton-type default setting. In particular, we explore the impact of changing correlation between names on these adjustments and study the effect of wrong-way and right-way risk.

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“…Concerning the debate on the controversial meaning of DVA, which can be realized only given one's own default, see for exampleGregory and German (2012).…”

mentioning

confidence: 99%

Counterparty credit risk in a multivariate structural model with jumps

Ballotta¹,

Fusai²

2015

Finance

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“…Since both the surviving and the substituting counterparty are probably Banks with a mutual CSA agreement, the risk free close-out seems a reasonable assumption. The literature on the subject is rich (see, for example [79], [80], [92]), but, overall, the scientific community has not yet identified a definitive choice. In conclusion, the choice between risk free and risky close-out is a possible source of model risk uncertainty in the bCVA calculation.…”

Section: Close-outmentioning

confidence: 99%

Prudent Valuation Guidelines and Sound Practices

Bianchetti

Cherubini

2016

SSRN Journal

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“…If we decompose a bond yield f X t , where X is either equal to C, for the counterparty, or B for the bank, as 12 We adopt the riskless close-out convention, leading to perfectly collateralized exposures being used in the expressions for CVA and DVA. An important point, though, is that the value of future defaults may be incorporated into the close-out claim, put forth upon default, if a so-called risky close-out is performed (see [30,31]). However, for unsophisticated counterparties, such as the ones that tend to not have collateral agreements with the bank, we would expect a riskless closeout, in which the claim is based on the riskless value, since such counterparties are not likely to have the ability to calculate CVA and DVA.…”

Section: Financing the Collateral Gapmentioning

confidence: 99%

A Bond Consistent Derivative Fair Value

Gunnesson¹,

Morales²

2014

SSRN Journal

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In this paper we present a rigorously motivated pricing equation for derivatives, including cash collateralization schemes, which is consistent with quoted market bond prices. Traditionally, there have been differences in how instruments with similar cash flow structures have been priced if their definition falls under that of a financial derivative versus if they correspond to bonds, leading to possibilities such as funding through derivatives transactions. Furthermore, the problem has not been solved with the recent introduction of Funding Valuation Adjustments in derivatives pricing, and in some cases has even been made worse.In contrast, our proposed equation is not only consistent with fixed income assets and liabilities, but is also symmetric, implying a well-defined exit price, independent of the entity performing the valuation. Also, we provide some practical proxies, such as first-order approximations or basing calculations of CVA and DVA on bond curves, rather than Credit Default Swaps.

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Closing Out the DVA Debate

Cited by 5 publications

References 2 publications

Counterparty credit risk in a multivariate structural model with jumps

Counterparty credit risk in a multivariate structural model with jumps

Prudent Valuation Guidelines and Sound Practices

A Bond Consistent Derivative Fair Value

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