An Introduction to XVA

Specialeforsvar ved Nicolaj Gautier Schmit

Titel: An Introduction to XVA

Abstract: This paper gives an introduction to XVA (valuation adjustments) of financial derivatives. Two different XVA models are derived. They are based on the funding valuation adjustment model of Vladimir Piterbarg and the semi-replication model of Burgard and Kjaer. Combined the two models gives rise to CVA, DVA, FVA, FCA and COLVA adjustments. The concepts of jump-processes, the Feynman-Kac theorem along with other technical results are included to justify the derivation of the two models. After deriving each of the models, simple numerical examples are presented to give an indication of the magnitude of the different valuation adjustments. Further the link between the two models is established and subjects including funding strategies and netting is discussed. The overall conclusion is that valuation adjustments can be signify-cant and possibly alter the value of a derivative contract by several percent when credit risk and funding costs are included. The project also gives a brief introduction to other XVA related subjects including the FVA debate and regulatory implications of the different valuation adjustments 

Vejleder: Rolf Poulsen
Censor:   Bjarne Astrup Jensen, CBS