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Since modeling leaves complete freedom we can assume both market and credit risks can enter the picture. However the minimum requirement is (migrations and) defaults simulation, how does this configure as "pure" market risk (especially in the latter IDRC case), as various people claim?

Why would CVA be more credit-related than IRC? After all CVA is about prices and IRC about exposures and defaults (yeah, of course this is incorrect, but let's play the devil's advocate), even though they are both motivated by adverse market moves. (Atleast Brigo calls them both credit risks iirc.) Is it simply because of spreads simulation? Or because we're patching a market risk measure? Or is there a more sound reason? And why isnt IRC just a liquidity-enhanced credit VaR?

I've been given very odd and contradictory answers, and wont state here my understanding of the issue to avoid introducing more confusion and hoping to hear a clear definition of the two risks. Which is not so easy given the blurring boundary.

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I am not that into banking regulations: could you please spell out some of the acronyms ? Thanks! – Richard Feb 12 at 8:53
    
Incremental (Default) Risk Charge (now morphed again as DRC iirc), and Credit Valuation Adjustment. – Quartz Feb 12 at 16:51

You find the IRC methodology paper written by Tim Xiao at

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2426836

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Hi Dora, welcome to quant stack exchange. Can you provide the salient points from the paper that answers the OP's question? – AfterWorkGuinness Oct 15 '15 at 2:53
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This is not really an answer. – Gordon Jan 13 at 18:21

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