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.