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Credit Valuation Adjustment
Credit valuation adjustments (CVAs) are accounting adjustments made to reserve a portion of profits on uncollateralized financial derivatives. They are charged by a bank to a risky (capable of default) counterparty to compensate the bank for taking on the credit risk of the counterparty during the life of the transaction. These most common transaction types are interest rate derivatives, foreign exchange derivatives, and combinations thereof. The reserved profits can be viewed mathematically as the net present value of the credit risk embedded in the transaction. In financial mathematics one defines CVA as the difference between the risk-free portfolio value and the true portfolio value that takes into account the possibility of a counterparty's default. In other words, CVA is the market value of counterparty credit risk. This price depends on counterparty credit spreads as well as on the market risk factors that drive derivatives' values and, therefore, exposure. CVA is one of a f ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Portfolio (finance)
In finance, a portfolio is a collection of investments. Definition The term “portfolio” refers to any combination of financial assets such as stocks, bonds and cash. Portfolios may be held by individual investors or managed by financial professionals, hedge funds, banks and other financial institutions. It is a generally accepted principle that a portfolio is designed according to the investor's risk tolerance, time frame and investment objectives. The monetary value of each asset may influence the risk/reward ratio of the portfolio. When determining asset allocation, the aim is to maximise the expected return and minimise the risk. This is an example of a multi-objective optimization problem: many efficient solutions are available and the preferred solution must be selected by considering a tradeoff between risk and return. In particular, a portfolio A is dominated by another portfolio A' if A' has a greater expected gain and a lesser risk than A. If no portfolio dominate ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Basel Committee On Banking Supervision
The Basel Committee on Banking Supervision (BCBS) is a committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten (G10) countries in 1974. The committee expanded its membership in 2009 and then again in 2014. As of 2019, the BCBS has 45 members from 28 jurisdictions, consisting of central banks and authorities with responsibility of banking regulation. Overview The committee provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. The committee frames guidelines and standards in different areas – some of the better known among them are the international standards on capital adequacy, the Core Principles for Effective Banking Supervision and the Concordat on cross-border banking supervision. The committee's Secretariat is located at the Bank for International Settlements (BIS) in ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Mathematical Finance
Mathematical finance, also known as quantitative finance and financial mathematics, is a field of applied mathematics, concerned with mathematical modeling of financial markets. In general, there exist two separate branches of finance that require advanced quantitative techniques: derivatives pricing on the one hand, and risk and portfolio management on the other. Mathematical finance overlaps heavily with the fields of computational finance and financial engineering. The latter focuses on applications and modeling, often by help of stochastic asset models, while the former focuses, in addition to analysis, on building tools of implementation for the models. Also related is quantitative investing, which relies on statistical and numerical models (and lately machine learning) as opposed to traditional fundamental analysis when managing portfolios. French mathematician Louis Bachelier's doctoral thesis, defended in 1900, is considered the first scholarly work on mathematical fina ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Potential Future Exposure
{{Unreferenced, date=March 2007 Potential future exposure (PFE) is the maximum expected credit exposure over a specified period of time calculated at some level of confidence (i.e. at a given quantile). PFE is a measure of counterparty risk/credit risk. It is calculated by evaluating existing trades done against the possible market prices in future during the lifetime of transactions. It can be called sensitivity of risk with respect to market prices. The calculated expected maximum exposure value is not to be confused with the maximum credit exposure possible. Instead, the maximum credit exposure indicated by the PFE analysis is an upper bound on a confidence interval for future credit exposure. Credit risk managers have traditionally remained focused on current exposure measurement (i.e., current mark-to-market exposure, plus outstanding receivables) and collateral management. The problem with this focus is that it places excessive emphasis on the present and fails to provide a ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Financial Derivative
In finance, a derivative is a contract that ''derives'' its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the "underlying". Derivatives can be used for a number of purposes, including insuring against price movements ( hedging), increasing exposure to price movements for speculation, or getting access to otherwise hard-to-trade assets or markets. Some of the more common derivatives include forwards, futures, options, swaps, and variations of these such as synthetic collateralized debt obligations and credit default swaps. Most derivatives are traded over-the-counter (off-exchange) or on an exchange such as the Chicago Mercantile Exchange, while most insurance contracts have developed into a separate industry. In the United States, after the financial crisis of 2007–2009, there has been increased pressure to move derivatives to trade on exchanges. Derivatives are one of the ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Swaptions
A swaption is an option granting its owner the right but not the obligation to enter into an underlying swap. Although options can be traded on a variety of swaps, the term "swaption" typically refers to options on interest rate swaps. Types of swaptions There are two types of swaption contracts (analogous to put and call options): *A payer swaption gives the owner of the swaption the right to enter into a swap where they pay the fixed leg and receive the floating leg. *A receiver swaption gives the owner of the swaption the right to enter into a swap in which they will receive the fixed leg, and pay the floating leg. In addition, a "straddle" refers to a combination of a receiver and a payer option on the same underlying swap. The buyer and seller of the swaption agree on: *The premium (price) of the swaption *Length of the option period (which usually ends two business days prior to the start date of the underlying swap), *The terms of the underlying swap, including: **Notion ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Investment Banking
Investment banking pertains to certain activities of a financial services company or a corporate division that consist in advisory-based financial transactions on behalf of individuals, corporations, and governments. Traditionally associated with corporate finance, such a bank might assist in raising financial capital by underwriting or acting as the client's agent in the issuance of debt or equity securities. An investment bank may also assist companies involved in mergers and acquisitions (M&A) and provide ancillary services such as market making, trading of derivatives and equity securities, FICC services ( fixed income instruments, currencies, and commodities) or research (macroeconomic, credit or equity research). Most investment banks maintain prime brokerage and asset management departments in conjunction with their investment research businesses. As an industry, it is broken up into the Bulge Bracket (upper tier), Middle Market (mid-level businesses), and boutique ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Monte-Carlo Simulation
Monte Carlo methods, or Monte Carlo experiments, are a broad class of computational algorithms that rely on repeated random sampling to obtain numerical results. The underlying concept is to use randomness to solve problems that might be deterministic system, deterministic in principle. They are often used in physics, physical and mathematics, mathematical problems and are most useful when it is difficult or impossible to use other approaches. Monte Carlo methods are mainly used in three problem classes: optimization, numerical integration, and generating draws from a probability distribution. In physics-related problems, Monte Carlo methods are useful for simulating systems with many coupling (physics), coupled degrees of freedom, such as fluids, disordered materials, strongly coupled solids, and cellular structures (see cellular Potts model, interacting particle systems, McKean–Vlasov processes, kinetic theory of gases, kinetic models of gases). Other examples include modeling ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Credit Quality
A credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government), predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting. The credit rating represents an evaluation of a credit rating agency of the qualitative and quantitative information for the prospective debtor, including information provided by the prospective debtor and other non-public information obtained by the credit rating agency's analysts. Credit reporting (or credit score) – is a subset of credit rating – it is a numeric evaluation of an ''individual's'' credit worthiness, which is done by a credit bureau or consumer credit reporting agency. Sovereign credit ratings A sovereign credit rating is the credit rating of a sovereign entity, such as a national government. The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investor ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Basel 3
Basel III is the third Basel Accord, a framework that sets international standards for bank capital adequacy, stress testing, and liquidity requirements. Augmenting and superseding parts of the Basel II standards, it was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–08. It is intended to strengthen bank capital requirements by increasing minimum capital requirements, holdings of high quality liquid assets, and decreasing bank leverage. Basel III was published by the Basel Committee on Banking Supervision in November 2010, and was scheduled to be introduced from 2013 until 2015; however, implementation was extended repeatedly to 1 January 2022 and then again until 1 January 2023, in the wake of the COVID-19 pandemic. The new standards that come into effect in January 2023, that is, the Fundamental Review of the Trading Book (FRTB) and the Basel 3.1: Finalising post-crisis reforms, are sometimes referred to as Base ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Counterparty
A counterparty (sometimes contraparty) is a legal entity, unincorporated entity, or collection of entities to which an exposure of financial risk may exist. The word became widely used in the 1980s, particularly at the time of the Basel I deliberations in 1988. Well-drafted contracts usually attempt to spell out in explicit detail what each counterparty's rights and obligations are in every conceivable circumstance, though there are limits. There are general provisions for how counterparties are treated under the law, and (at least in common law legal systems) there are many legal precedent A precedent is a principle or rule established in a previous legal case that is either binding on or persuasive for a court or other tribunal when deciding subsequent cases with similar issues or facts. Common-law legal systems place great valu ...s that shape the common law. Financial services sector Within the financial services sector, the term market counterparty is used to refer to gov ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
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