Why do counterparty risk pricing adjustments need be considered in a bilateral counterparty risk perspective?


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    $\begingroup$ Can you elaborate the question a little? A bilateral arrangement (between say, A and B) is more prone to counterparty risk as the entire brunt of the counterparty B's default is taken by A. If the same agreement was undertaken with a central counterparty (clearing house, and thus no longer a bilateral agreement) neither would be exposed to the other counterparty defaulting as the CCP would make them whole. In such a case, counterparty risk pricing adjustments would only need to be applied if there was a 'risk' of counterparty default, which would only exist is the trade was bilateral. $\endgroup$ – compilation-error Mar 28 '16 at 0:59

If each party uses unilateral CCR model, i.e. Only takes into account the other party's probability of default, they are much less likely to agree on a price and actually trade.

In general, you want to take your own default into account simply because it is market observable through cds and bond spreads. And because it will affect your funding.

  • $\begingroup$ Thx, do you have pleae some lectures in that subject ?! $\endgroup$ – Sino Mar 28 '16 at 12:15
  • $\begingroup$ Andrew Green's book on XVA is the best reference out there by far. $\endgroup$ – AFK Mar 28 '16 at 20:55

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