The XVA of Financial Derivatives: CVA, DVA and FVA Explained

Dongsheng Lu is Managing Director and Head of Quantitative Research at BNY Mellon's Derivatives Trading Unit. His group is responsible for developing derivatives trading/pricing models and building trading/risk management infrastructure for interest rate, equity and foreign exchange derivatives trading business. Before joining BNY Mellon in 1998, he did two years of postdoctoral research at University of Pennsylvania on quantum mechanical calculations and molecular simulations of biological enzymes. He holds a PhD in Theoretical Chemistry from the Ohio State University and a B.S. degree from University of Science and Technology of China.

This latest addition to the Financial Engineering Explained series focuses on the new standards for derivatives valuation, namely, pricing and risk management taking into account counterparty risk, and the XVA's Credit, Funding and Debt value adjustments.

A short, practical but technical guide to derivatives valuation and risk management under the new paradigm

PART I: INTRODUCTION TO DERIVATIVE TRADING1. The Participants of Derivative Market and their Interaction (Chart)2. Trading Perspective3. Operational: Collateral with Counterparty4. Funding5. Legal6. RegulationsPART II: EXPOSITION OF VARIOUS VALUATION ADJUSTMENTS7. CVA (Including DVA) Primer: Expected Credit Default Loss8. FVA Primer: Derivatives Pricing under Different Funding Situations9. FVA Debate and Solution10. RVAPART III: MODELING, CALCULATION AND SYSTEM IMPLEMENTATION11. CVA and FVA Modeling12. CVA and FVA with Complex CSA Terms13. RVA and Downgrade Triggers: Complexity of Replacement Process14. ExamplesPART IV: CVA/FVA RISK MANAGEMENT AND HEDGING15. Traditional Derivatives Greeks and Risk Management16. Gamma, Theta and Cross Greeks for CVA17. Collateral Operations, Hedging and Cross Currency Risk18. Rating Dependent Funding: Credit Dependency of Funding19. CVA and FVA Together: Cross Terms20. Wrong Way Risk, Wrong Way Collateral21. Systemic Downgrade Risk22. Centralized vs. Decentralized Management23. Absence of Market Traded CDS: No Individual Names