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With the liquidity coverage ratio looking to be implemented largely unchanged come 2015, the SARB approved this week a R240 billion rand emergency support facility, which will come into effect from January 2013. This reserve facility, represents a Level 1 asset for participating banks (as mentioned in Section 40 (b) of Basel III: International framework for liquidity …Read more
Many options model papers propose an option model, derive a solution, or deal with the framework the model provides in which to price an option, and finally, detail how to calibrate the model to market data. This is equally true of many other derivatives models. So, what’s the problem with calibration? Consider a number of …Read more
DVA is the controversial twin of CVA. The acceptence of DVA as a mark-to-market item on derivatives positions should be no more controversial than the acceptance of CVA. If one accepts that in a trade between institution A and institution B, institution A will mark-to-market CVA charges on their positions, then for there to be …Read more
The upshot of our post on Wrong-Way Risk, is that it is entirely possible to need multiple views of CVA. The challenge is now that CVA, an already onerous calculation, may need to be calculated twice. Practically, we strive to reuse as much calculation between the two methods as possible. First, we deal with the regulatory …Read more
What is the impact or what is the potential difference between the regulatory method and whatever model an institution may use to calculate their CVA VaR (as well as their CVA)? For the purposes of a demonstration and investigation, we consider Merton’s Model, where the equity value of the firm is modelled as the assets …Read more