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doublebarrier2000
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Posts: 15
Joined: July 14th, 2002, 3:00 am

XVA; X = cost of busted limits + PL predict failure

October 28th, 2019, 8:37 pm

When a counterparty defaults, you will loose XYZ in terms of the positive  "mark to market" of the positions you had with that counterparty

What about the the fact that those trades were part of a complex hedging strategy that has bnow left you
 
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SWilson
Posts: 83
Joined: February 13th, 2018, 5:27 pm

Re: XVA; X = cost of busted limits + PL predict failure

October 28th, 2019, 9:19 pm

What's wrong with re-entering into trades with another counterparty?  What if you had a liability balance to that counterparty?  Counterparty valuation adjustments or CVA is common to factor in credit ratings for just such a thing.
 
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DavidJN
Posts: 242
Joined: July 14th, 2002, 3:00 am

Re: XVA; X = cost of busted limits + PL predict failure

October 30th, 2019, 11:39 pm

Collateral exchange and central clearing are fairly effective modern mechanisms designed to reduce losses due to the failure of a counterparty. It is interesting that you did not mention them.
 
If your failed counterparty provided a hedge you will have to replace it with another trade from another counterparty. If the original trade was collateralized, your losses will be limited to any positive P&L that has moved your way since your last collateral exchange (typically one business day), plus any amount your position might run away from you during the time it takes to find a replacement trade with another counterparty (often termed the “cure period”).
 
If your trade with a failed counterparty is not collateralized and/or centrally cleared, well, there’s always the courts!