A note on CVA and wrong way risk

2016 ◽  
Vol 03 (02) ◽  
pp. 1650012
Author(s):  
Roberto Baviera ◽  
Gaetano La Bua ◽  
Paolo Pellicioli
Keyword(s):  
Interest Rate ◽  
Recursion Formula ◽  
Slight Modification ◽  
Path Dependency ◽  
Model Parameters ◽  
Market Data ◽  
Interest Rate Swap ◽  
Fast Approach ◽  
Straightforward Generalization ◽  
Rate Swap

Hull and White approach to Wrong Way Risk in the computation of Credit Value Adjustment (CVA) is considered the most straightforward generalization of the standard Basel approach. The model is financially intuitive and it can be implemented by a slight modification of existing algorithms for CVA calculation. However, path dependency in the key quantities has non-elementary consequences in the calibration of model parameters. We propose a simple and fast approach for computing these quantities via a recursion formula. We show in detail the calibration methodology on market data and CVA computations in two relevant cases: a FX forward and an interest rate swap.

scholarly journals Deep Learning-Based Method for Computing Initial Margin

2021 ◽  
Vol 7 (1) ◽  
pp. 41
Author(s):  
Joel Pérez Villarino ◽  
Álvaro Leitao Rodríguez
Keyword(s):  
Neural Networks ◽  
Artificial Neural Networks ◽  
Deep Learning ◽  
Interest Rate ◽  
Financial Institutions ◽  
Optimal Configuration ◽  
Model Parameters ◽  
Basel Iii ◽  
Interest Rate Swap ◽  
Rate Swap

Following the guidelines of the Basel III agreement (2013), large financial institutions are forced to incorporate additional collateral, known as Initial Margin, in their transactions in OTC markets. Currently, the computation of such collateral is performed following the Standard Initial Margin Model (SIMM) methodology. Focusing on a portfolio consisting of an interest rate swap, we propose the use of Artificial Neural Networks (ANN) to approximate the Initial Margin value of the portfolio over its lifetime. The goal is to find an optimal configuration of structural hyperparameters, as well as to analyze the robustness of the network to variations in the model parameters and swap features.

Yield Curves, Swap Curves, and Term Structure of Interest Rates

2019 ◽  
pp. 203-228
Author(s):  
Tom P. Davis ◽  
Dmitri Mossessian
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Term Structure ◽  
Yield Curve ◽  
Yield Curves ◽  
No Arbitrage ◽  
Interest Rate Swap ◽  
The Interest Rate ◽  
Rate Swap ◽  
The U.S

This chapter discusses multiple definitions of the yield curve and provides a conceptual understanding on the construction of yield curves for several markets. It reviews several definitions of the yield curve and examines the basic principles of the arbitrage-free pricing as they apply to yield curve construction. The chapter also reviews cases in which the no-arbitrage assumption is dropped from the yield curve, and then moves to specifics of the arbitrage-free curve construction for bond and swap markets. The concepts of equilibrium and market curves are introduced. The details of construction of both types of the curve are illustrated with examples from the U.S. Treasury market and the U.S. interest rate swap market. The chapter concludes by examining the major changes to the swap curve construction process caused by the financial crisis of 2007–2008 that made a profound impact on the interest rate swap markets.

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