Gregory, The xVA Challenge: Counterparty Credit Risk, Funding, Collateral, and Capital Practice Question Set covers the following learning objectives:
Chapter 2: Derivatives
Define derivatives and explain how derivative transactions create counterparty credit risk.
Compare and contrast exchange-traded derivatives and over-the-counter (OTC) derivatives, and discuss the features of their markets.
Describe the process of clearing a derivative transaction.
Identify the participants and describe the use of collateralization in the derivatives market.
Define the International Swaps and Derivatives Association (ISDA) Master Agreement, the risk-mitigating features it provides, and the default events it covers.
Describe the features and use of credit derivatives and discuss potential risks they may create.
Describe central clearing of OTC derivatives and discuss the roles, mandate, advantages, and disadvantages of the central counterparty (CCP).
Explain the margin requirements for both centrally-cleared and non-centrally-cleared derivatives.
Define special purpose vehicles (SPVs), derivatives product companies (DPCs), monolines, and credit derivatives product companies (CDPCs) and describe the limitations of using them as risk mitigating methods.
Describe the approaches used and the challenges faced in modeling derivatives risk.
Chapter 3. Counterparty Risk and Beyond
Describe counterparty risk and differentiate it from lending risk.
Describe transactions that carry counterparty risk and explain how counterparty risk can arise in each transaction.
Identify and describe institutions that take on significant counterparty risk.
Describe credit exposure, credit migration, recovery, mark-to-market, replacement cost, default probability, loss given default, and the recovery rate.
Describe credit value adjustment (CVA) and compare the use of CVA and credit limits in evaluating and mitigating counterparty risk.
Identify and describe the different ways institutions can quantify, manage and mitigate counterparty risk.
Identify and explain the costs of an OTC derivative.
Explain the components of the xVA term.
Chapter 6: Netting, Close-out and Related Aspects
Explain the purpose of an ISDA master agreement.
Summarize netting and close-out procedures (including multilateral netting), explain their advantages and disadvantages, and describe how they fit into the framework of the ISDA master agreement.
Describe the effectiveness of netting in reducing credit exposure under various scenarios.
Describe the mechanics of termination provisions and trade compressions and explain their advantages and disadvantages.
Provide examples of trade compression of derivative positions, calculate net notional exposure amount, and identify the party holding the net contract position in a trade compression.
Identify and describe termination events and discuss their potential effects on parties to a transaction.
Chapter 7: Margin (Collateral) and Settlement
Describe the rationale for collateral management.
Describe the terms of a collateral and features of a credit support annex (CSA) within the ISDA Master Agreement including threshold, initial margin, minimum transfer amount and rounding, haircuts, credit quality, and credit support amount.
Calculate the credit support amount (margin) under various scenarios.
Describe the role of a valuation agent.
Describe the mechanics of collateral and the types of collateral that are typically used.
Explain the process for the reconciliation of collateral disputes.
Explain the features of a collateralization agreement.
Differentiate between a two-way and one-way CSA agreement and describe how collateral parameters can be linked to credit quality.
Explain aspects of collateral including funding, rehypothecation and segregation.
Explain how market risk, operational risk, and liquidity risk (including funding liquidity risk) can arise through collateralization.
Describe the various regulatory capital requirements.
Chapter 8. Central Clearing
Define a central counterparty (CCP) and describe the mechanics of central clearing.
Explain the concept of novation under central clearing.
Define netting, multilateral offset, and compression and provide examples of each.
Describe the application and estimation of margin and default funds under central clearing.
Discuss the risks faced by a CCP and the ways it manages its exposures.
Provide examples of a loss waterfall.
Explain the different methods of managing the default of one or more members of a CCP.
Compare bilateral and central clearing.
Compare initial margin and default fund requirements for clearing members in relation to loss coverage, cost of clearing, and moral hazard.
Describe the advantages and disadvantages of central clearing.
Chapter 11. Future Value and Exposure
Describe and calculate the following metrics for credit exposure: expected mark-to-market, expected exposure, potential future exposure, expected positive exposure and negative exposure, effective expected positive exposure, and maximum exposure.
Compare the characterization of credit exposure to VaR methods and describe additional considerations used in the determination of credit exposure.
Identify factors that affect the calculation of the credit exposure profile and summarize the impact of collateral on exposure.
Identify typical credit exposure profiles for various derivative contracts and combination profiles.
Explain how payment frequencies and exercise dates affect the exposure profile of various securities.
Explain the general impact of aggregation on exposure, and the impact of aggregation on exposure when there is correlation between transaction values.
Describe the differences between funding exposure and credit exposure.
Explain the impact of collateralization on exposure, and assess the risk associated with the remargining period, threshold, and minimum transfer amount.
Assess the impact of collateral on counterparty risk and funding, with and without segregation or rehypothecation.
Chapter 17. Credit Value Adjustment (CVA)
Explain the motivation for and the challenges of pricing counterparty risk.
Describe credit value adjustment (CVA).
Calculate CVA and the CVA spread with no wrong-way risk, netting, or collateralization.
Evaluate the impact of changes in the credit spread and recovery rate assumptions on CVA.
Describe debt value adjustment (DVA) and bilateral CVA (BCVA).
Explain the distinctions between unilateral CVA (UCVA) and BCVA, and between unilateral DVA (UDVA) and BCVA.
Calculate DVA, BCVA, and BCVA as a spread.
Explain how netting can be incorporated into the CVA calculation.
Define and calculate incremental CVA and marginal CVA, and explain how to convert CVA into a running spread.
Explain the impact of incorporating collateralization into the CVA calculation, including the impact of margin period of risk, thresholds, and initial margins.
Describe wrong-way risk and contrast it with right-way risk.
Identify examples of wrong-way risk and examples of right-way risk.
Discuss the impact of collateral on wrong-way risk
Identify examples of wrong-way collateral.
Discuss the impact of wrong-way risk on central counterparties.
Describe the various wrong-way modeling methods including hazard rate approaches, structural approaches, parametric approaches, and jump approaches.
Explain the implications of central clearing on wrong-way risk.