In this work Massimo Morini and Andrea Prampolini argue that KVA is a component of profit turned into a valuation adjustment as a by-product of regulatory constraints based on a conservative consideration of market hedges. The regulatory foundations of KVA are analyzed from RWAs to the Leverage...

In modern monetary systems most money is created by commercial banks; we review how private money in the form of deposits circulates and discuss its possible tokenization. We show that a compelling case for the tokenization of bank deposits exists irrespective of the debate regarding central...

We analyze the liquidity component in a derivative transaction where both counterparties can default, and the effect of a counterparty's default probability on his funding costs and benefits. The analysis shows that the value of a transaction is influenced not by the total cost of funding of a...

We discuss in detail the mapping methodology for the valuation of bespoke single tranche Collateralized Debt Obligations in the context of the stochastic recovery gaussian factor modelling framework recently proposed by Amraoui and Hitier (2008)

In this paper we focus on a fundamental practical issue regarding the bilateral counterparty risk adjustment. The past literature assumes that, at the moment of the first default, a risk-free closeout amount will be used. The closeout amount is the net present value of the residual deal which is...

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...

Different anomalies have appeared in the interest rate market after the burst of the credit crunch. A wide wedge has opened between the market quotes of Forward Rate Agreements and their standard spot Libor replication, and large Basis Spreads have appeared for exchanging floating payments with...

This work focuses on the swaptions automatic cascade calibration algorithm (CCA) for the LIBOR Market Model (LMM) first appeared in Brigo and Mercurio (2001). This method induces a direct analytical correspondence between market swaption volatilities and LMM parameters, and allows for a perfect...

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...

This paper presents the implementation of a derivative market on a public blockchain. Managing derivatives on a distributed system requires a careful re-design of the derivatives business model. The implementation presented here provides many of the features financial professionals are used to,...