New Derivatives Valuation Methods: XVA & Multi-Curve Pricing

3 days 6-8 Nov 2017, London UK £3,645.00 + VAT* Download brochure Add to basket

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Until recently the methodology for pricing and valuation of interest rate and currency swaps has been stable for decades. However, recent years have seen a paradigm shift, in particular in the subtle yet complex changes to the discounting methodology necessary for the restoration of consistent ‘arbitrage-free’ valuation of OTC derivatives, with explicit incorporation of tenor/currency basis in swap pricing. Further, related to such changes as well as the introduction of new regulatory rules and capital requirements, the global OTC derivatives sector has seen the need for formulating a range of valuation adjustments, in order to better reflect counterparty credit risk exposure, funding and capital costs.

This 3 day agenda will offer delegates familiar with the basic principles of swap valuation a detailed examination of the evolution of ‘multi-curve’ valuation, its rationale as well as the practical steps involved in its implementation. The agenda also examines the impact of collateral agreements (CSA) on pricing and valuation, including all associated issues of collateral optionality and cheapest-to-deliver (CTD) discount curve modelling.

As revised accounting standards mandate the incorporation of counterparty credit risk adjustments to mark to market valuation, and regulatory capital (Basel 3) rules require CVA related charges, the agenda further examines the incorporation of counterparty credit risk exposure into swap valuation, offering delegates an examination of CVA and DVA charges, their determination, impact on valuation as well as CVA hedging.

Funding related valuation adjustments (FVA) are also examined, as well as the newest areas of focus for banks following the recent mandatory requirements for collateralisation of non-cleared derivatives – initial margin and the requirement for computation of margin valuation adjustments (MVA). The industry is still at an early stage of development of a standardised approach to the further, formalised measure of KVA – cost or regulatory capital adjustment, but the programme will seek to provide an overview of the challenges and industry approaches developing in this complex new area.

Who should attend

  • Derivative Traders and Dealers
  • Structurers
  • Market Risk managers
  • Credit Risk managers
  • Quantitative analysts
  • Product control
  • Operations
  • Collateral management
  • Banks, Institutional and Corporate end-users of Derivatives

Participants are assumed to have prior knowledge of derivatives, and ideally should possess at least a basic mathematical fluency. The course agenda incorporates a number of computer based practical exercises. Delegates will need to possess at least a basic knowledge of Excel.


We work with a series of expert instructors, please select the course location of interest to review the credentials of who will be delivering the programme.

Graham Dudlyke

Graham Dudlyke is a leading consultant and specialist trainer with over three decades of experience within the international financial markets, holding senior positions in a number of leading financial institutions in both London and New York.

His career boasts a wealth of experience within the derivative and capital markets, with senior roles at JP Morgan chase and Mitsubishi UFJ Securities International within derivatives trading, marketing, structuring and risk management. At JP Morgan he managed rate option trading books, and additionally held responsibility for developing the derivatives trading and marketing presence within European markets. At Mitsubishi UFJ he held responsibility for the management of interest rate derivatives trading, and played a major role in building and developing the interest rate derivatives trading business into new products and markets.

In 2011 Graham joined Hilltop Fund Management LLP, London, as a consultant, advising on hedge fund trading and complex investment strategies.

As an independent training consultant for over 10 years, Graham brings his unique practitioner’s perspective and insight to financial markets, providing training and consultancy services to many of the world’s leading financial institutions - banks, institutional investors and asset managers, official institutions and other related financial bodies. The world’s largest asset manager, global ‘bulge bracket’ investment banks, a number of supranational development banks, Fortune 500 companies, as well as central banks across four continents are all represented amongst the institutions that Graham has worked with in the delivery of specialised training and consultancy needs.

Graham is a consultant to Euromoney Institutional Investor plc, international business-to-business publisher, business conference, seminar and training course provider, as a regular and world renowned expert on derivatives and capital markets.

Graham holds an M.B.A. from Imperial College, London and an M.A. from Oxford University.



Central London Hotel Venue

All courses are held at four or five star venues in Central London, Zone 1. We strive to provide you with a training environment of the highest quality, to ensure that the whole learning experience exceeds your expectations.

Your training venue will be confirmed by one of our course administrators approximately 3-4 weeks before the course start date.

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Multi-Curve Valuation - The New Paradigm in Interest Rate Derivatives Pricing

In this first session we review the methodology for pricing and valuation of generic and simple non-generic swaps, and examine the practical steps of constructing swap discount curves. A fundamental knowledge of the contractual structure and mechanics of interest rate swaps is assumed.
Until recently methods for valuing interest rate swaps have been stable for decades. However, recent events have seen an unprecedented evolution, in particular in the changes to the discounting methodology for the valuation of fully/partially collateralised derivatives and in the methods developed to better reflect counterparty risk, capital and funding costs.

Foundations of swap pricing and valuation

  • Yield curve construction: Modelling the deterministic LIBOR forward curve
  • Single curve framework [single discount and forward curve]
  • LIBOR as risk-free rate proxy
  • Curve calibration: ‘Bootstrapping’ market data
  • Market data sources: Futures vs. FRAs, swaps, bonds
  • Practical challenges in constructing the arbitrage-free curve
  • Yield curve interpolation methods
  • Application: Pricing and valuation of generic and non-generic swap structures
  • Convexity adjustment

Risk Management

  • Sources of interest rate risk: 
    - Forward rate sensitivity
    - Discount rate sensitivity 
  • Interest rate risk measures: Delta (DV01/PV01)
  • Single curve interest rate sensitivity analysis: Delta vector (grid-point) risk report
  • Risk reporting: creating a replicating portfolio (futures, bond, swap) equivalents

Pricing Interest Rate Derivatives in a Multi-Curve Framework

  • Background: Interest Rate Markets post-Financial Crisis
    - Overview of money market rates: LIBOR/Euribor, OIS, repo rates
    - The credit crunch and re-pricing of LIBOR
    - Counterparty risk and collateral; liquidity risk premia  
  • The effects of the financial crisis on OTC derivatives pricing
    - Divergence of LIBOR and OIS rates
    - Divergence of FRA and implied forward rates
    - OIS - LIBOR basis: Emergence of liquidity/credit risk premia
    - Trend from unsecured to collateralised funding
    - LIBOR fragmentation: Emergence of Tenor basis
  • Breakdown of single curve pricing framework
  • Arbitrage opportunities of self-discounting methodology

Modern Interest Rate Modelling: Multi-curve curve pricing framework

  • Development of multi-curve pricing; differentiation of forwarding and discount curves
  • Overnight Index Swaps (OIS)
  • Calibrating the OIS curve; practical challenges
  • Dual curve calibration:
    - Discount function
    - Dual curve calibration
    - Optimisation: Root find and Jacobian matrix transformation
  • Tenor and cross currency basis
    - Tenor basis (1m vs 3m; 3m vs 6m) 
    - Cross currency basis
    - Multi-curve pricing: incorporating basis into cross currency swap valuation
    - Constructing adjusted swap curves for valuation of cross currency swaps
  • Impact of OIS discounting on swap pricing and valuation
  • Collateral optionality: constructing multiple OIS discount functions
  • Determining Cheapest to Deliver discount curve
  • Application: Pricing and Valuation of generic and non-standard swaps in dual curve framework
  • Risk Management
    - Dual curve interest rate sensitivity analysis
        - Sensitivity to LIBOR rate curve
        - Sensitivity to OIS curve
        - Basis risks
        - Impact of LIBOR – OIS correlation on risk sensitivities and hedge estimation
        - Adjusted bucket hedges and OIS bucket hedges

Workshop: Hedging a swap transaction; Risk analysis of swap portfolio; Delta risk measurement and replicating portfolio construction.

Collateral Management and Valuation

  • Bilateral margining: Credit Support Annex (CSA)
    - CSA ‘standard’ terms; 1-way and 2-way (symmetric) CSA agreements
    - Standardised CSA terms: SCSA (2013) and SCSA2 (2014)
    - Costs and benefits of different standardised CSA terms
  • Central clearing counterparties
    - CCP collateral terms
  • CSA terms and choice of appropriate discounting method
  • Impact of CSA/OIS discounting on swap pricing and valuation
  • Practical issues in CSA discounting:
    - Liquidity/collateral issues:
      - Collateral terms controversies; Standard CSA resolution
      - Collateral currency arbitrage (optionality in CSA agreements)
      - CTD assumptions in valuation
      - Optimal choice of collateral currency
      - Collateral substitution/re-hypothecation
      - Haircut differences between repo market and CSA terms
  • Hedge accounting issues
  • IT issues
    - Multi-curve bootstrapping
    - Trade booking – deal valuation and curve selection
XVA: Credit, Funding and Capital Valuation Adjustments

Alongside, and in part related to, the evolution of multi-curve pricing methodologies, OTC derivatives have seen the need for introduction of a range of valuation adjustments, critical to fully reflecting all associated costs of hedging, and integral to current accounting treatment and regulatory capital requirements. Some valuation adjustments, such as CVA, DVA are relatively well-established and have standardised estimation and management methodologies, whilst others such as margin and capital value adjustments (MVA and KVA) represent a newer challenge as regulations effective Sep 2016 come into force, requiring margining of non-cleared OTC derivative transactions.

This section examines all XVA components, methods for computing together with an analysis of the associated technological and IT infrastructure challenges, as well as XVA sensitivities and their hedging.


  • Consolidated approach to OTC derivative valuation adjustments
  • Technological challenges of XVA
  • Practical implementation of XVA models: MC simulation techniques
  • Risk management: XVA sensitivities and hedging strategies
  • XVA desks: Centralisation of credit, funding and capital valuation adjustments, XVA sensitivities
  • Impact of XVA on the global OTC derivatives industry

Credit and Debit Valuation Adjustments (CVA, DVA)

  • Deriving hazard rate functions; CDS market data transparency; Alternatives and proxies
  • Expected positive exposure (EPE) 
  • Wrong way risk modelling
  • Estimation methods: MC simulation techniques
  • Examples of CVA/DVA effects on swap valuation; novation calculations
  • Portfolio effects in CVA estimation (netting, collateral); calculating marginal CVA effects
  • CSA terms and effects on CVA calculation
  • Basel III: CVA capital charges; Standard and advanced methods
  • CVA risk sensitivities and hedging techniques

Funding Valuation Adjustment (FVA)

  • Incorporating funding costs into derivatives valuation models: FBA and FCA adjustments 
  • FVA computation techniques for uncollateralised transactions
  • Modelling FVA and Treasury funds transfer pricing
  • FBA/DVA overlap

Collateral Value Adjustment 

  • Funding cost considerations of Collateralised transactions
  • FVA variation margin estimation (Coll VA or FVAVM) 
  • Challenges: different types of available collateral/costs
  • Collateral optionality and CTD computation

Capital Value Adjustment (KVA)

  • Adjustment for costs of regulatory rules and capital requirements (Basel 3, FRTB and beyond)
  • Estimating the lifetime cost of capital charges
  • Challenges in KVA calculation and implications for the OTC derivatives industry

Margin Value Adjustment (MVA)

  • Regulatory timetable for non-cleared OTC derivatives collateral management 
  • Adjusting values for initial margin funding costs
  • Calculation of MVA and MVA sensitivities
  • Standard and model based approaches to MVA
  • Delta-VaR based MVA calculation
  • Regulatory requirements of model based approach
  • ISDA™ Standard Initial Margin Method (SIMM)
  • Impact of thresholds on MVA, MVA volatility
  • Wrong way risk in MVA estimation
  • Estimated global costs and consequences of MVA requirements

Workshop: Hedging a swap transaction; Risk analysis of swap portfolio; Delta risk measurement and replicating portfolio construction.

Stochastic Interest Rate Models


  • Stochastic term structure models
  • Developing a consistent platform for valuation of generic and exotic interest rate derivatives
  • Stochastic interest rate models – implementation techniques: 
    - Numerical and Analytical methods
    - MC Simulation
  • Single-factor (e.g. BDT, Hull-White) and multi-factor models
    - Calibrating arbitrage-free bimonial, trinomial models
    - BGM (LIBOR) short rate market model
    - SABR model
    Model implementation by simulation
    Calibration to cap/swaption volatility surfaces
    Correlation modelling: Specifying the forward rate correlation matrix
  • Practical advantages and limitations of different modelling approaches
  • Lognormal versus normal volatility versus normalised (basis point volatility)
  • Rationale for interest rate derivatives
  • Normal versus lognormal models
  • SABR model; managing transition from normal to lognormal assumption
  • SABR modelling for negative rates
  • Adaptation of stochastic interest rate models to dual curve pricing (dual curve LIBOR market model)
  • Modelling the LIBOR – OIS basis:
  • 1-factor stochastic basis modelling
  • Applications of stochastic rate models:
    - Pricing and valuation of exotic interest rate derivatives and structured products


Review and Close

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