XVA analysis

Regarding derivative products activities, the post-crisis years are marked by a transition from an individual hedging logic, hegemonic since Black-Scholes, towards a more global optimization logic at the level of the bank’s book, integrating incompleteness related to counterparty risk (CVA) and its consequences in terms of financing costs (FVA) and capital (KVA). In addition, the generalization of centralized trading and initial margins (in bilateral as well as centralized trading) leads to a transformation of counterparty risk into liquidity risk, and therefore of CVA into FVA, in the form of its avatar MVA (cost financing of the initial margins).