Neural networks have risen in popularity for a number of applications, also in quantitative finance. However, the low interpretability of their ‘black box' representation has always been a common criticism. Previous literature has attempted to provide a better understanding and visualisation...

In recent years, forward initial margin has attracted the attention of practitioners and academics. From a computational point of view, it poses a challenging problem as it requires the implementation of a nested Monte Carlo simulation. Abundant literature has been published on approximation...

Infinitesimal sensitivities, computed as derivatives of pricing functions, are useful to find high-frequency hedge ratios. However, they are less useful for the purpose of optimising 2-week VaR, especially if one includes shocks from stressed periods, as is required for applications to margin...

Implementations of the Standard Initial Margin Model (SIMM) and the Sensitivity Based Approach (SBA) in the Fundamental Review of the Trading Book (FRTB), both call for the calculation of sensitivities with respect to a standardised set of risk factors. Since standard factors are generally...

In the aftermath of the 2007 global financial crisis, banks started reflecting into derivative pricing the cost of capital and collateral funding through XVA metrics. XVA is a catch-all acronym whereby X is replaced by a letter such as C for credit, D for debt, F for funding, K for capital and...

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...

Banking operations are being rewired around a pair of KVA/FVA metrics which quantify market incompleteness, i.e. the impossibility of perfect replication. The FVA is the cost of funding of debt liabilities while the KVA is the risk adjustment for equity liabilities, also called cost of capital....