Deep Learning-Based Method for Computing Initial Margin

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.

Non-Linear Impact of Chinese Treasury Bond Futures on the Information Content of IRS

This paper investigates the impact of Chinese Treasury bond (CTB) futures on the information content of interest rate swap (IRS) from a multifractality perspective. We first use multifractal detrended fluctuation analysis (MF-DFA) method and show that the swap rate and the CTB yield exhibit strong multifractality. In addition, employing multifractal detrended cross-correlation analysis (MF-DCCA) method, we find that cross-correlations between the swap rate and the CTB yield are multifractally persistent. Moreover, after the reintroduction of Treasury bond futures, the persistence of cross-correlation between the series is weaker. Our results indicate that the information content of IRS decreased after the re-launch of CTB futures.

Cross-Currency Interest Rate Swap Application in the Long-Term Currency Risk Management

<p>Effective currency risk management using various derivatives is particularly important under increased market volatility. The risk is relatively higher for longer than shorter time frames. This study highlights the implementation of selected instruments for long-term hedging. It presents the application of cross-currency interest rate swap as a currency risk hedging tool used by Polish exporters, mainly manufacturers generating their revenues mostly abroad (in euro area), exposed to negative exchange rate fluctuations. The paper covers issues related to the pricing, market risk estimation and collateral required in the OTC market, as well as undertakes a sensitivity analysis in search for exchange rates at which margin call occurs. There is a comparative analysis and back test simulation conducted using market data from exchange and money markets. The study emphasized that the analyzed instrument meets the expectations in terms of hedging the company cash flows, as well as may generate additional benefits due to the still existing interest rate differential.</p>

xVA: DEFINITION, EVALUATION AND RISK MANAGEMENT

xVA is a collection of valuation adjustments made to the classical risk-neutral valuation of a derivative or derivatives portfolio for pricing or for accounting purposes, and it has been a matter of debate and controversy. This paper is intended to clarify the notion of xVA as well as the usage of the xVA items in pricing, accounting or risk management. Based on bilateral replication pricing using shares and credit default swaps, we attribute the P&L of a derivatives trade into the compensation for counterparty default risks and the costs of funding. The expected present values of the compensation and the funding costs under the risk-neutral measure are defined to be the bilateral CVA and FVA, respectively. The latter further breaks down into FCA, MVA, ColVA and KVA. We show that the market funding liquidity risk, but not any idiosyncratic funding risks, can be bilaterally priced into a derivative trade, without causing price asymmetry between the counterparties. We call for the adoption of VaR or CVaR methodologies for managing funding risks. The pricing of xVA of an interest-rate swap is presented.

The Valuation of Interest Rate Swap with Bilateral Counterparty Risk

This paper presents an analytical model for valuing interest rate swaps, subject to bilateral counterparty credit risk. The counterparty defaults are modeled by the reduced-form model as the first jump of a time-inhomogeneous Poisson process. All quantities modeled are market-observable. The closed-form solution gives us a better understanding of the impact of the credit asymmetry on swap value, credit value adjustment, swap rate and swap spread.

The Valuation of Interest Rate Swap with Bilateral Counterparty Risk

This paper presents an analytical model for valuing interest rate swaps, subject to bilateral counterparty credit risk. The counterparty defaults are modeled by the reduced-form model as the first jump of a time-inhomogeneous Poisson process. All quantities modeled are market-observable. The closed-form solution gives us a better understanding of the impact of the credit asymmetry on swap value, credit value adjustment, swap rate and swap spread.

The Valuation of Interest Rate Swap with Bilateral Counterparty Risk

This paper presents an analytical model for valuing interest rate swaps, subject to bilateral counterparty credit risk. The counterparty defaults are modeled by the reduced-form model as the first jump of a time-inhomogeneous Poisson process. All quantities modeled are market-observable. The closed-form solution gives us a better understanding of the impact of the credit asymmetry on swap value, credit value adjustment, swap rate and swap spread.