Published: 25th March 2017 by William Webster
Derivatives are traditionally valued by taking the expected future cash flows and then discounting them in accordance with interest rates to give today’s value (present value).
Implicit is the assumption that the derivative contract will run to its contractual date and all the cash flows will be paid and received. However, in the real world this may not occur. The counterparty may default.
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12th August 2011
Basel III is about tightening up the capital and liquidity requirements for financial institutions. Whilst regulators and politicians want to avoid further bails outs there is a danger that the new rules could add further disruption to the credit system. It therefore follows that the new legislation will take at least a decade to be applied and in the process it will be subject to alteration. To be clear bank regulation is very much in the "melting pot". For many firms Basel III will increase the costs of doing business. Banks that find ways to change what they do or the way they do it will use their capital more effectively (aka leverage). This quick guide considers tiers 1, 2 and 3, the credit value adjustment, the liquidity coverage ratio, the net stable funding ratio and the possible effect on firms.
25th March 2017
XVA refers to several different valuation adjustments that may be applied to derivatives. These adjustments have come about because the 2007/8 crisis caused us to question traditional models used to value trades. For example, the Libor based yield curve became significantly higher than a curve based on a “risk free” rate like the overnight index swap curve. The adjustments include:
25th March 2017
The Treasury function has several roles. At the highest level these include hedging and trading. The risks that are incurred are • Market risk (Interest rate & foreign exchange risk) • Liquidity risk • Operational risk • Credit risk What sort of things create credit exposures?