Counterparty Credit Risk and Hybrid Models

The book’s content is focused on rigorous and advanced quantitative methods for the pricing and hedging of counterparty credit and funding risk. The new general theory that is required for this methodology is developed from scratch, leading to a consistent and comprehensive framework for counterparty credit and funding risk, inclusive of collateral, netting rules, possible debit valuation adjustments, re-hypothecation and closeout rules. The book however also looks at quite practical problems, linking particular models to particular ‘concrete’ financial situations across asset classes, including interest rates, FX, commodities, equity and credit itself.

The authors also aim to help quantitative analysts, traders, and anyone else needing to frame and price  counterparty credit and funding risk, to develop a ‘feel’ for applying sophisticated mathematics and stochastic calculus to solve practical problems.

The main models are illustrated from theoretical formulation to final implementation with calibration to market data, always keeping in mind the concrete questions being dealt with. The authors stress that each model is suited to different situations and products, pointing out that there does not exist a single model which is uniformly better than all the others, although the problems originated by counterparty credit and funding risk point in the direction of global valuation. Finally, proposals for restructuring counterparty credit risk, ranging from contingent credit default swaps to margin lending, are considered.
Table of contents
PART I Counterparty Credit Risk 23
1 Introduction
2 Context
3 Pricing Framework
4 Modeling the Counterparty Default
PART II Pricing Unilateral CVA
5 Unilateral CVA and Netting for Interest-Rates Products
6 Wrong-Way Risk (WWR) for Interest-Rates
7 Unilateral CVA for Commodities with WWR
8 Unilateral CVA for Credit with WWR
9 Unilateral CVA for Equity with WWR
10 Unilateral CVA for FX
PART III Advanced Topics
11 CVA Pricing in a Post-Crisis World
12 Bilateral CVA and Interest-Rate Products
13 Collateral, Netting, Close-Out and Re-Hypothecation
14 Bilateral Collateralized CVA for Interest-Rates and Credit
15 Including Funding and Margining Costs
16 Final Tour and Conclusions