From CVA to EPE - Chirikhin

BUILDING TOMORROW CVA to EPEC omparisons and contrastsAndrey Chirikhin , Han LeeRoyal Bank of Scotland3 February 2012 OutlineCVA and EPE IntroductionComparisons and contrastsFuture workConclusionOutlineCVA and EPE IntroductionComparisons and contrastsFuture workConclusionCVA and EPE IntroductionFundamental questionsIAre CVA and EPE scopes overlapping or complimentary?IShould modelling approaches be similar or different?ICan CVA infrastructure be reused for EPE?ICan EPE infrastructure be reused for CVA?IWhat are the implications forIactive counterparty risk management,Iregulatory capital management,Ioptimization of funding?CVA and EPE IntroductionComparison and scopeDespite aiming at seemingly same goals, the scopes of EPE and CVAsystems are quite FMTM yesyesMain outputEEPE, CVA VAR (EE)CVA, DVA, FVA, ..Applicationwhole bookactively hedgedMeasurehistorical or risk neutralrisk neutralCollateral logicyes, approximateyes, part of payoffScenarios/deltasstress test, ad-hocdeltas, PNL predictPre-dealyesyes, including deltasBacktestregular, statisticalad-hoc, PNL explainCalibration/estimationat least quarterlydriven by hedgingCVA and EPE IntroductionCVA DefinitionICVA is the floating leg of an FTD with stochastic notionalCVA=CcyRZT0EQ MtM+t(1 Rct) cte Rt0( cu+ su)duDt dt CcyRN i=1EQ MtM+ti(1 Rcti) Dti pcFTD(ti)

BUILDING TOMORROW rbs.com/gbm From CVA to EPE Comparisons and contrasts Andrey Chirikhin, Han Lee Royal Bank of Scotland 3 February 2012

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