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Azureaus
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Joined: January 23rd, 2021, 12:14 pm

EUR/USD X-Currency Swap Risks (XVA)

January 23rd, 2021, 12:26 pm

I have an interview coming up with an xVA  desk. I'm mostly from a technology background so I meet a fair chunk of the requirements but have gaps in my product and hedging knowledge which I'm trying to rectify as quickly as possible. I'm trying to improve my intuition around trading some of the instruments and the natural hedges to them. The interviewer knows this is where I am weak and I believe is  looking for me to show willingness and an ability to pick up these things quickly.

I have been given this as an exercise be a colleague to give me a jumping off point to explore.

"What are the CVA risks on a EUR/USD cross-currency swap 10y with Vodafone"

Is there anyone who could advise me where I could start with this? Perhaps an overview of the risks I might have to consider or point me towards something I can read to start getting to grips with this. I've got the "XVA challenge" which seems to be an excellent book but it's quite the tome. I'm going through it but fear I will struggle to synthesis this all in time.

Any advice or materials would be greatly appreciated - this could be a real life changing opportunity for me.
 
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Re: EUR/USD X-Currency Swap Risks (XVA)

January 23rd, 2021, 1:04 pm

Maybe take a look at some of the papers on SSRN - if you search for XVA, you will find a number of papers from about 2014 to the present - reading selectively will help get a grasp of the subject.  

This one would be one place to start:

KVA: Capital Valuation Adjustment - Green, Kenyon, and Dennis
It was originally published in Risk and although it's an older paper (2014), it lays out the issues quite well.

Here are a few more - and maybe other people will have something to add.

The FVA Puzzle: Accounting, Risk Management and Collateral Trading 
Claudio AlbaneseLeif B. G. Andersen and Stefano Iabichino
Global Valuation, Bank of America and JP Morgan 
Keywords: Funding, FVA, CVA, XVA, stress testing, funding arbitrage, accounting, OTC

Derivatives Funding, Netting and Accounting 
Christoph Burgard and Mats Kjaer
Bank of America - Bank of America Merrill Lynch and Bloomberg L.P. 
Keywords: Derivatives, Funding, Netting, Accounting, FVA, XVA, DVA, CVA, FTP

Derivatives Hedging, Capital and Leverage 
Andrea Prampolini and Massimo Morini
Banca IMI and Banca IMI 
Keywords: derivatives, hedging, capital, leverage, KVA, CVA, DVA, FVA, XVA, Basel III

These all go back to 2014, 2015, and are by practitioners and people I've seen present at quant conferences. They do dive in at different levels, but you can check out the references listed, do some other background reading, if needed, and then catch up to the present. There are many papers available, but pick and choose carefully. I sorted by "Most Downloaded" and then selected from there. Good luck.
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