Structural pricing of XVA metrics for energy commodities OTC trades

The global nancial crisis revealed that no economic entity can be considered default-free any more. Because of that, both banks and corporations have to deal with bilateral Counterparty Credit Risk (CCR) in their OTC derivatives trades. Such evidence implies the fair pricing of these risks, namely the Credit Valuation Adjustment (CVA) and its counterpart, the Debt Valuation Adjustment (DVA). Despite the more commonly used reduced-form approach, in this work the random default time is addressed via a structural approach a la Black and Cox (1976), so that the bankruptcy of a given rm is modelled as the rst-passage time of its equity value from a predetermined lower barrier. As in Ballotta et al. (2015), I make use of a time-changed Levy process as underlying source of both market and credit risk. The main advantage of this setup relies on its superior capability to replicate non null short-term default probabilities, unlike pure diusion models. Moreover, a numerical computation of the valuation adjustments for bilateral CCR in the context of energy commodities OTC derivatives contracts has been performed.

The aim of the present Chapter is to improve of the structural rst-passage framework built in Chapter 1 along several directions as well as test its robustness. Since typically commodity trades are not clearable under Central Clearing Counterparts (CCPs), it is worthy to assess the eect of bilateral Collateral Support Annex (CSA) agreements on CVA/DVA metrics. Moreover I introduce within my CCR modelling, the impact of state-dependent stochastic recovery rates. Furthermore, in order to stress-test my framework, I investigate the eects on CCR measures of multiplicative shocks to the two major drivers in the game: credit and volatility. Finally I propose an alternative balance-sheet calibration based on hybrid market/accounting data which is well suited in the commodity context in the light of small and medium size of corporations usually operating in the EU commodity derivatives market for risk-management purposes.