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XVA
X-Value Adjustment (XVA, xVA) is an hyponymy and hypernymy, umbrella term referring to a number of different "valuation adjustments" that banks must make when assessing the value of derivative (finance), derivative contracts that they have entered into. The purpose of these is twofold: primarily to hedge for possible losses due to counterparty credit risk, other parties' failures to pay amounts due on the derivative contracts; but also to determine (and hedge) the amount of capital required under the Basel III, bank capital adequacy rules. XVA has led to the creation of Trading desk, specialized desks in many banking institutions Financial risk management#Banking, to manage XVA exposures.International Association of Credit Portfolio Managers (2018)"The Evolution of XVA Desk Management"/ref> Context Historically, [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Financial Risk Management
Financial risk management is the practice of protecting Value (economics), economic value in a business, firm by managing exposure to financial risk - principally credit risk and market risk, with more specific variants as listed aside - as well as some aspects of operational risk. As for risk management more generally, financial risk management requires identifying the sources of risk, measuring these, and crafting plans to mitigation, mitigate them. See for an overview. Financial risk management as a "science" can be said to have been bornW. Kenton (2021)"Harry Markowitz" investopedia.com with modern portfolio theory, particularly as initiated by Professor Harry Markowitz in 1952 with his article, "Portfolio Selection"; see . The discipline can be qualitative and quantitative; as a specialization of risk management, however, financial risk management focuses more on when and how to Hedge (finance), hedge, often using financial instruments to manage costly exposures to risk. * ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Credit Valuation Adjustment
A Credit valuation adjustment (CVA), in financial mathematics, is an "adjustment" to a derivative's price, as charged by a bank to a counterparty to compensate it for taking on the credit risk of that counterparty during the life of the transaction. "CVA" can refer more generally to several related concepts, as delineated aside. The most common transactions attracting CVA involve interest rate derivatives, foreign exchange derivatives, and combinations thereof. CVA has a specific capital charge under Basel III, and may also result in earnings volatility under IFRS 13, and is therefore managed by a specialized desk. CVA is one of a family of related valuation adjustments, collectively xVA; for further context here see . Calculation 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 valu ... [...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 in the financial field. 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 with the 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 ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Monte Carlo Methods In Finance
Monte Carlo methods are used in corporate finance and mathematical finance to value and analyze (complex) instruments, portfolios and investments by simulating the various sources of uncertainty affecting their value, and then determining the distribution of their value over the range of resultant outcomes. This is usually done by help of stochastic asset models. The advantage of Monte Carlo methods over other techniques increases as the dimensions (sources of uncertainty) of the problem increase. Monte Carlo methods were first introduced to finance in 1964 by David B. Hertz through his ''Harvard Business Review'' article, discussing their application in Corporate Finance. In 1977, Phelim Boyle pioneered the use of simulation in derivative valuation in his seminal ''Journal of Financial Economics'' paper. This article discusses typical financial problems in which Monte Carlo methods are used. It also touches on the use of so-called "quasi-random" methods such as the use of ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Counterparty Credit Risk
Credit risk is the chance that a borrower does not repay a loan or fulfill a loan obligation. For lenders the risk includes late or lost interest and principal payment, leading to disrupted cash flows and increased collection costs. The loss may be complete or partial. In an efficient market, higher levels of credit risk will be associated with higher borrowing costs. Because of this, measures of borrowing costs such as yield spreads can be used to infer credit risk levels based on assessments by market participants. Losses can arise in a number of circumstances, for example: * A consumer may fail to make a payment due on a mortgage loan, credit card, line of credit, or other loan. * A company is unable to repay asset-secured fixed or floating charge debt. * A business or consumer does not pay a trade invoice when due. * A business does not pay an employee's earned wages when due. * A business or government bond issuer does not make a payment on a coupon or principal pa ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Margin (finance)
In finance, margin is the collateral that a holder of a financial instrument has to deposit with a counterparty (most often their broker or an exchange) to cover some or all of the credit risk the holder poses for the counterparty. This risk can arise if the holder has done any of the following: * Borrowed cash from the counterparty to buy financial instruments, * Borrowed financial instruments to sell them short, * Entered into a derivative contract. The collateral for a margin account can be the cash deposited in the account or securities provided, and represents the funds available to the account holder for further share trading. On United States futures exchanges, margins were formerly called performance bonds. Most of the exchanges today use SPAN ("Standard Portfolio Analysis of Risk") methodology, which was developed by the Chicago Mercantile Exchange in 1988, for calculating margins for options and futures. Margin account A margin account is a loan account w ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Regulatory Capital
A capital requirement (also known as regulatory capital, capital adequacy or capital base) is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity as a percentage of risk-weighted assets. These requirements are put into place to ensure that these institutions do not take on excess leverage and risk becoming insolvent. Capital requirements govern the ratio of equity to debt, recorded on the liabilities and equity side of a firm's balance sheet. They should not be confused with reserve requirements, which govern the assets side of a bank's balance sheet—in particular, the proportion of its assets it must hold in cash or highly-liquid assets. Capital is a source of funds, not a use of funds. From the 1880s to the end of the First World War, the capital-to-assets ratios globally declined sharply, before remaining relatively steady during the 20th century. Regu ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Financial Economics
Financial economics is the branch of economics characterized by a "concentration on monetary activities", in which "money of one type or another is likely to appear on ''both sides'' of a trade".William F. Sharpe"Financial Economics", in Its concern is thus the interrelation of financial variables, such as share prices, interest rates and exchange rates, as opposed to those concerning the real economy. It has two main areas of focus:Merton H. Miller, (1999). The History of Finance: An Eyewitness Account, ''Journal of Portfolio Management''. Summer 1999. asset pricing and corporate finance; the first being the perspective of providers of Financial capital, capital, i.e. investors, and the second of users of capital. It thus provides the theoretical underpinning for much of finance. The subject is concerned with "the allocation and deployment of economic resources, both spatially and across time, in an uncertain environment".See Fama and Miller (1972), ''The Theory of Finance'', ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Hyponymy And Hypernymy
Hypernymy and hyponymy are the wikt:Wiktionary:Semantic relations, semantic relations between a generic term (''hypernym'') and a more specific term (''hyponym''). The hypernym is also called a ''supertype'', ''umbrella term'', or ''blanket term''. The hyponym names a subset, subtype of the hypernym. The semantic field of the hyponym is included within that of the hypernym. For example, "pigeon", "crow", and "hen" are all hyponyms of "bird" and "animal"; "bird" and "animal" are both hypernyms of "pigeon", "crow", and "hen". A core concept of hyponymy is ''type of'', whereas ''instance of'' is differentiable. For example, for the noun "city", a hyponym (naming a type of city) is "capital city" or "capital", whereas "Paris" and "London" are instances of a city, not types of city. Discussion In linguistics, semantics, general semantics, and ontology components, ontologies, hyponymy () shows the relationship between a generic term (hypernym) and a specific instance of it (hyponym ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Bank Of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the Kingdom of England, English Government's banker and debt manager, and still one of the bankers for the government of the United Kingdom, it is the world's second oldest central bank. The bank was privately owned by stockholders from its foundation in 1694 until it was nationalised in 1946 by the Attlee ministry. In 1998 it became an independent public organisation, wholly owned by the Treasury Solicitor on behalf of the government, with a mandate to support the economic policies of the government of the day, but independence in maintaining price stability. In the 21st century the bank took on increased responsibility for maintaining and monitoring financial stability in the UK, and it increasingly functions as a statutory Financial regulation, regulator. The bank's headquarters have been in London's main financial di ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Prudential Regulation Authority (United Kingdom)
The Prudential Regulation Authority (PRA) is a United Kingdom financial services regulatory body, formed as one of the successors to the Financial Services Authority (FSA). The authority is responsible for the prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms. It sets standards and supervises financial institutions at the level of the individual firm. Although it was initially structured as a limited company wholly owned by the Bank of England, the PRA's functions have now been taken over by the Bank and are exercised through the Prudential Regulation Committee. The company has since been liquidated. The PRA was created by the Financial Services Act 2012 and formally began operating alongside the new Financial Conduct Authority on 1 April 2013. As the Bank of England is operationally independent of the Government of the United Kingdom, the PRA is a quasi-governmental regulator, rather than an arm of the gove ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Netting
In law, set-off or netting is a legal technique applied between persons or businesses with mutual rights and Liability (financial accounting), liabilities, replacing gross positions with net positions. It permits the rights to be used to discharge the liabilities where Crossclaim, cross claims exist between a plaintiff and a respondent, the result being that the gross claims of mutual debt produce a single net claim. The net claim is known as a Financial law, net position. In other words, a set-off is the right of a debtor to balance mutual debts with a creditor. Any balance remaining due either of the parties is still owed, but the mutual debts have been set off. The power of net positions lies in reducing credit risk, credit exposure, and also offers regulatory capital requirement and settlement advantages, which contribute to market stability. Difference between set-off and netting Whilst netting and set-off are often used interchangeably, a legal distinction is made between ' ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
