The book's content is focused on rigorous and advanced quantitative
methods for the pricing and hedging of counterparty credit and funding
risk. The new general theory that is required for this methodology is
developed from scratch, leading to a consistent and comprehensive
framework for counterparty credit and funding risk, inclusive of
collateral, netting rules, possible debit valuation adjustments,
re-hypothecation and closeout rules. The book however also looks at
quite practical problems, linking particular models to particular
'concrete' financial situations across asset classes, including interest
rates, FX, commodities, equity, credit itself, and the emerging asset
class of longevity.
The authors also aim to help quantitative analysts, traders, and anyone
else needing to frame and price counterparty credit and funding risk, to
develop a 'feel' for applying sophisticated mathematics and stochastic
calculus to solve practical problems.
The main models are illustrated from theoretical formulation to final
implementation with calibration to market data, always keeping in mind
the concrete questions being dealt with. The authors stress that each
model is suited to different situations and products, pointing out that
there does not exist a single model which is uniformly better than all
the others, although the problems originated by counterparty credit and
funding risk point in the direction of global valuation.
Finally, proposals for restructuring counterparty credit risk, ranging
from contingent credit default swaps to margin lending, are considered.
