A practical implementation of XVA in the new normal

The Great Financial Crisis (GFC) of 2008 left many financial institutions devastated. Despite the practice of advanced risk management at the time, society witnessed the collapse of the “too big to fail” institutions. Gaping holes within the existing risk framework lurked, which both regulators and practitioners failed to detect. This dissertation discusses the symptoms of the crisis that were overlooked and explores the financial engineering implemented post-2008 to avoid the next crisis. The author considers the work of Hull, White, Gregory, Brigo, Kenyon, Green, Morini, Pallavicini, Piterbarg, Burgard, Kjaer, Elouerkhaoui, and Castagna. A literature review is provided for each of the mentioned names to highlight each author’s contribution to the field of Total Value Adjustment (XVA) pricing. An in-depth analysis on the funding invariance principle suggested by Elouerkhaoui is provided followed by a model implementation. The core aim of this dissertation is to review XVA valuations from a practitioners perspective using the framework provided by Elouerkhaoui. A secondary aim of the dissertation is to briefly explore the work of Aboura and Maillard on the Cornish-Fisher Transformation (CF). The CF is considered as a parsimonious approach in estimating non-normal distributions, therefore an interesting alternative to price XVA using Monte Carlo (MC) simulation.

Grantor dc:publisher

University of Pretoria

Year dc:date.issued

2017

Advisor dc:contributor.advisor

• Mare, Eben

• XVA pricing

Statement dc:rights

• © 2018 University of Pretoria. All rights reserved. The copyright in this work vests in the University of Pretoria. No part of this work may be reproduced or transmitted in any form or by any means, without the prior written permission of the University of Pretoria.

Dc Identifier Other

A2018

OAI identifier oai:identifier

oai:repository.up.ac.za:2263/63610