XVA Market Data and Valuation Settings

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XVA calculations will required additional credit curves and market data:

a matrix of correlations between underlying IR rates and FX rates (base vs counter currency pairs)
the volatility curves associated to those underlying IR rates and FX rates
credit curves associated to counterparties ^(*) for CVA and FVA calculations
a “SELF” credit curve for DVA and FBA calculations

^(*) The mapping between the “Counterparty” trade attribute and the relevant credit curve will be driven by the credit curve’s “Ticker” attribute.

For the purposes of FCA and FBA calculations, funding nodes will be required (with the relevant MDK mapping) and can only be defined for credit curves whose Seniority = “SNRFOR”.

On this page, we will discuss:

how to create a rates vs FX correlation matrix
how to add correlation points to such matrix
how to define the XVA model parameters

Correlation Matrices

1. Creating a Correlation Matrix

Under XVA/CORRELATION MATRICES, at the correlation matrix list level, you can create a matrix by clicking on ADD NEW (or edit an existing one by double-clicking on the line item).

For the purpose of this example, you can manually create a new matrix to replicate the “USD_CorrMatrix” matrix which can be used for XVA calculations for the LONDON_FICC company setup (IRS_PTF_2 portfolio), with USD as discount currency.

Alt for image — Creating a Company
XVA/CORRELATION MATRICES

A description of the correlation matrix’s attributes and corresponding permissible values are set out in the table below.

2. Adding Correlation Points

Under XVA/CORRELATION MATRICES, at the correlation matrix level (after double-clicking on it at the correlation matrix list level), you can IMPORT a list of correlation points or manually create one (e.g., a EUR IR vs. EUR/USD FX rate) by first clicking on EDIT, then on ADD CORRELATION PAIR.

A description of a correlation point’s attributes and corresponding permissible values are set out in the table below.

XVA Model Parameters and Assumptions

For XVA calculations, you will need to:

parameterise the Hull-White model that is used for XVA calculations
define the main projection index that will be used in the diffusion process on a currency basis

1. Hull-White Model Parameters

Under XVA/SETTINGS, in the EXPOSURE CALCULATION PARAMETERS window, you can specify the parameterisation of the XVA model by clicking on EDIT.

2. XVA Projection Index Definition

For each currency that has more than one associated projection indices, you will need to specify the main projection index that will be used for simulations in the Hull-White model. This is done under XVA/SETTINGS, in the MAIN PROJECTION INDEX window, by clicking on EDIT.

A description of the XVA projection index definition and corresponding permissible values are set out in the table below.

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