In this paper we develop structural first passage models (AT1P and SBTV) with time-varying volatility and characterized by high tractability, moving from the original work of Brigo and Tarenghi (2004, 2005) and Brigo and Morini (2006). The models can be calibrated exactly to credit spreads using...

With the rapid development of the credit derivatives market, efficient pricing of default has become an extremely important issue for the credit risk management of banks and other investors. We consider here some of the opportunities and problems that the development of this market poses to...

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...

We show that when a derivative portfolio has different correlated underlyings, hedging using classical greeks (first-order derivatives) is not the best possible choice. We first show how to adjust greeks to take correlation into account and reduce P&L volatility. Then we embed...

The Initial Margin is an amount of collateral that CCPs and Regulators require dealers to post beside Variation Margin. Computing the funding cost associated to Initial Margin requirements, at times called MVA (Margin Value Adjustment), presents both conceptual and computational challenges. Here...

In July 2011 Risk Magazine reported that some market operators believe that in 2007 and 2008 Libor rates underestimated the real cost of funding of banks since “some banks were putting in artificially low rates” (Wood, 2011). This is currently the focus of some lawsuits and investigations....

Standard techniques for incorporating liquidity costs into the fair value of derivatives produce counter-intuitive results when credit risk of the counterparty (CVA) and of the investor (DVA) are added to the picture. Here, Massimo Morini and Andrea Prampolini show that a consistent framework...

Gaussian Copula as a model for default correlation has been recently criticized for a number of fallacies in its application to pricing and risk management of financial liabilities. Here we point out an element of model risk that appears to be overlooked. When the Gaussian Copula is applied to...