Questions tagged [cva]

The Credit Value Adjustment, or CVA for short, is the difference between the risk free value and the value including counterparty risk of a contract or portfolio.

59 questions
Filter by
Sorted by
Tagged with
1 vote
49 views

Assessment of cross-sectional regression model for CDS spreads of CVA calculations

For the purposes of the CVA calculation, someone might need to proxy the CDS spreads (and their associated implied hazard rates) for counterparty cases with illiquid CDSs. A common approach (leaving ...
• 131
105 views

Why is Feynman-Kac formula applicable in Burgard-Kjaers PDE paper?

In the paper Partial Differential Equation Representation of Derivatives with Bilateral Counterparty Risk and Funding Costs by Burgard and Kjaer, they say we may formally apply the Feynman-Kac theorem ...
• 410
1 vote
150 views

Understanding the cost involved in collateralization of existing OTC business

I am looking for a qualitative assessment regarding the (negotiable) 'cost' incurred when two counterparties agree on collateralizing existing derivatives business. I think the core of my question is: ...
• 6,772
1 vote
126 views

How xVA is applied to determine final price

Typically, the Actual price is derivative transaction (e.g. Swap) is sum of Base price and xVA e.g. cVA. Where Base price is analytical price with consideration of standard parameters e.g. risk free ...
• 838
172 views

What does the NPV of a CVA trade tell you

From the perspective of an XVA desk, what does the NPV actually tell you in terms of Counter-party Credit Risk? I understand that CVA + DVA gives you the NPV of any given trade (at the simplest level),...
96 views

Close-out in practice: default settlements and counterparty models

Any model on counterparty risk for derivative contracts needs to make an assumption on the close-out convention, that is the rule used to determine at which value a defaulted derivative transaction ...
• 8,119
1 vote
239 views

conditional expectation formula of default in CVA

Here is the formula of CVA in page 74 in book Modern Derivatives Pricing and Credit Exposure Analysis. Here $t_0 = t<t_1<\cdots<t_n = T;$ $\tau$ is the ...
• 545
1 vote
380 views

Why might a cross currency swap from EUR into USD have higher CVA than a cross currency swap from USD into EUR?

I was having a discussion with a colleague in the industry, who mentioned in passing that CVA on a cross currency swap from EUR into USD (pay EUR) is always higher than if paying USD and receiving EUR....
• 11
130 views

Wrong way risk exotic option

I've priced an exotic option with Monte Carlo method under the Heston model. Then I want to estimate Wrong way risk. In a paper I've found this method to calculate WWR: WWR can be modeled by means of ...
654 views

CVA Probability of default

I have to estimate CVA for an exotic option. I used Monte Carlo method to price the option with 1000 number of simulation, maturity = 1 year, and 360 time steps. So I have two questions: I've read in ...
1 vote
282 views

Can I calculate the CVA or DVA over a sovereign portfolio?

Hi I haven't understood if I can apply the CVA just for derivatives or I can estimate the PD from CDS spreads and apply these in a bonds portfolio for the CVA calculus. The CVA literature refers to "...
• 47
1 vote
101 views

CVA for a portfolio of long and short options

I am looking to estimate the CVA/DVA for a portfolio of options. For simplicity sake, let's assume there are two FX options in the portfolio, one long and one short. Both options have the same ...
516 views

Discounting for XVA

I was thinking that since XVA is on uncollaterized exposure, we should be using LIBOR discounting environment. Why don't we do that?
430 views

Hedging XVA sensitivities and funding risk

FVA is a hot topic today and I've been thinking on how its managed inside a treasury department. Although the pricing/calculation is well covered in academic material and there is some sort of ...
903 views

sign of CVA (Credit Value Adjustment)

I recently read chapter 14 of Gregory's The xVA Challenge. He defines CVA as (formula 14.2) $$CVA = -LGD \cdot \sum_{i = 1}^m EE(t_i) \cdot PD(t_{i-1}, t_i),$$ where $LGD$ is the Loss Given Default, ...
• 1,456
137 views

Counterparty exposure for a swap [closed]

What is the exact details of swap option whose PV gives the counterparty exposure at horizon of t=15months for a payer swap of strike 1% above ATM and length 5y starting at 2y?
561 views

CVA for options

I am trying to do a simple unilateral CVA for call and put options. I found this discretised formula online:  CVA = \sum_{i=1}^m \frac{EE(t_{i-1})DF(t_{i-1}) + EE(t_i)DF(t_i)}{2} \left( PD(t_i) - PD(...
365 views

Cash Flow Hedge Accounting

In the context of hedging a fixed rate foreign currency liability with a receive-fixed pay-fixed CCS is known that in order to assess the effectiveness of a cash flow hedge the ratio of the change in ...
1k views

How to interpret the (expected) exposure and CVA of an option or a single share

I have a quick (hopefully simple) question regarding the interpretation of the expected exposure of a call option and a single share. I've done some computations on the formula for the expected ...
1 vote
183 views

A crash course in pricing

I need to refresh all the pricing theory. Is there anything like a crash course with practical and intuitive explanations? I will provide any further information. I am a mathematical engineer. I am ...
1 vote
253 views

Should one calculate CVA even when exposure is negative?

I have an example, where two companies have the bilateral nature of derivative contract. Companies have exchanged collateral a number of times, so at a certain point in time each sides holds some ...
• 135
1 vote
86 views

Change in CDS and counterparty

How can CDS contracts be used in order to hedge (neutralize) CVA charge movements with respect to changes in the underlying rates for a counterparty? In here CVA is a proportion that’s subtracted ...
• 41
442 views

How does one make money from CVA (Credit Valuation Adjustment)?

I am new to Quantitative Finance but have been doing a lot of reading on Counterparty Credit Risk. I understand the definition of CVA being: "the difference between the risk-free portfolio value ...
• 43
457 views

How to estimate market based PD and LGD for small enterprises?

I am estimating CVA/DVA for derivatives... How to estimate PD and LGD (or RR) based on market data for the small enterprises, if there is no external rating for them and they don't have bonds or ...
• 135
3k views

CVA - Where does the default probability (PD) come from?

Some authors use CDS from the market to derive the implied default probability (from a risk-neutral point of view). I wonder: how exactly does a CDS reflect counterparty risk? Let me put an ...
• 296
75 views

In CVA simulation, timesteps vs number of simulations?

On a CVA system with limited computational power. For pricing, What is best, More timesteps and less number of simulations or less timesteps and more number of simulations? for example with a whole ...
2k views

Collateralized / uncollateralized swap

Is a fully collateralized interest rate swap considered free of counterparty credit risk? Or close to risk free? Therefore discounted by the rate that best proxies the risk-free rate (which is the OIS-...
1k views

Why xVA is only applicable to derivatives contracts

I was wondering why xVA, according to its definition, is applicable only to derivatives contract. For example shouldn't be applicable to corporate loans as well? The counterparty who borrowed the ...
• 283
535 views

i'm struggling with the idea of the time default random variable in the Unilateral CVA. While the CVA in discrete model is only the sum of the discounted exposure of your financial position (the ...
• 103
1 vote
104 views

Can hazard rate intensity models be used with bonds?

We are trying to build a risk neutral PD Model for institutions without CDS. In Malz's "Financial Risk Management: Models, History and Institutions", Chapter 7, its said that we can extract the ...
1 vote
3k views

What is CVA (credit valuation adjustment)?

According to Wikipedia, CVA is defined as the difference between the risk-free portfolio value and the true portfolio value that takes into account the possibility of a counterparty’s default. What ...
• 649
872 views

How to compute the CVA on a swap with SPV?

If we have a swap with a bank and Special Purpose Vehicle (SPV), and the swap is un-collateralized , how do we estimate Credit Value Adjustment on the swap? I will be able to get the Expected ...
• 921
3k views

• 1,042