The topics of Economic Capital modelling, reverse stress testing and credit limits are inextricably intertwined as they all focus on exceptional loss events. In this paper, we use the KVA framework in to frame these three topics within a single unified approach. We propose setting credit limits...

The Dodd-Frank Act and the recently proposed Basel Committee regulatory framework for CCPs are a game changer for counterparty credit risk management. The practice of charging an upfront fee as a Credit Valuation Adjustment (CVA) to provision against counterparty credit risk liabilities is being...

Valuing, hedging and securitizing counterparty credit risk involves analyzing large portfolios of netting sets over time horizons spanning decades. Theory dictates that the simulation measure should be coherent, i.e. arbitrage free. It should also be used consistently both to simulate and to...

We introduce an innovative theoretical framework for the valuation and replication of derivative transactions between defaultable entities based on the principle of arbitrage freedom. Our framework extends the traditional formulations based on Credit and Debit Valuation Adjustments (CVA and...

We introduce an innovative theoretical framework for the valuation and replication of derivative transactions between defaultable entities based on the principle of arbitrage freedom. Our framework extends the traditional formulations based on credit and debit valuation adjustments (CVA and...

We introduce an innovative theoretical framework for the valuation and replication of derivative transactions between defaultable entities based on the principle of arbitrage freedom. Our framework extends the traditional formulations based on credit and debit valuation adjustments (CVA and...

We recently introduced the FVA/FDA accounting framework for funding costs, aiming to provide an accounting method that reasonably balances the, often conflicting, concerns of accountants, regulators, traders, and financial economists. While introduction of FVA/FDA accounting does not lead to...