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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.

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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 ...
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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 ...
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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: ...
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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 ...
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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),...
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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 ...
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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 ...
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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....
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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 ...
User022's user avatar
3 votes
2 answers
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 ...
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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 "...
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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 ...
user078913's user avatar
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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?
abhinav mehta's user avatar
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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 ...
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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, ...
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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?
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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(...
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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 ...
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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 ...
Charlie Shuffler's user avatar
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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 ...
Nasser Bin's user avatar
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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 ...
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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 ...
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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 ...
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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 ...
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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 ...
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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 ...
Mauro Meneses Ramirez's user avatar
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2 answers
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-...
profesarrmariorty's user avatar
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5 answers
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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 ...
MaPy's user avatar
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Credit Value Adjustment

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 ...
Carlo's user avatar
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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 ...
Mauro Meneses Ramirez's user avatar
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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 ...
JungleDiff's user avatar
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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 ...
ash's user avatar
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CVA formula for a call option

I have a very quick question. Suppose that I buy a European call option from party S with expiry $T$. I want to determine the general formula for the CVA of the option, at time $t$. If I let $T_1\leq ...
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Funding Valuation Adjustment (FVA) - understanding issues

Having trouble with understanding the logic of FVA. Let's assume that as a trader I trade with a client an uncollateralised fx forward. Then, I hedge my position with "risk-free" bank with which I ...
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cva for a collateralised swap

For a swap thats fully collateralised once a day, i suppose that the cva measures risk only for the intraday chance of counterparty default? Surely thats tiny enough to be neglible, or am i missing ...
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MVA, initial margin valuation adjustment for derivatives

I have read a number articles about margin valuation adjustment (MVA), which effectively is the funding cost of the initial margin, which has become important because of the rise of central clearing ...
user24918's user avatar
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Basel Basic CVA Approach Model Foundations

I am working on CVA (credit valuation adjustments). The Basel committee released consultative document reviewing the CVA Risk Framework 'Review of the Credit Valuation Adjustment Risk Framework (2015)'...
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Swaptions to calculate swap exposure for CVA

I am looking at using the swaption method to calculate the EPE and ENE on a swap over its life, to use in CVA/DVA calculations. I have a number of questions, how well does this method work in ...
James87649's user avatar
9 votes
2 answers
4k views

How to calculate the CVA of a forward contract?

I am having trouble calculating the CVA of a forward contract. The question is presented below Question: There exists a long forwards position underlying on gold with 2 years remaining. The ...
Gustavo Louis G. Montańo's user avatar
4 votes
3 answers
5k views

Credit Valuation adjustment (CVA) Hedges

I need to understand once CVA Desk has CVA number(Bilateral or Unilateral) for a Counterparty, how does it take hedge position. for Eg: if CVA charge for my bank to JPM is 100K Dollars. What does ...
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CVA using difference between 2 counterparty's spreads

The approximation to calculate CVA as a spread is $CVA = Spread * Expected$ $Exposure$. I assume this means the counterparty's spread over a proxy for the risk free rate such as LIBOR or OIS. Is this ...
AfterWorkGuinness's user avatar
1 vote
1 answer
883 views

CVA as a running spread - risk annuity calculation in the Monte Carlo framework

I have simulated future term structures in the one-factor Hull-White model and calculated the CVA of a particular trade (let's say, now I have it in absolute value, in dollars). However, I want to ...
QuackQuack's user avatar
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1 answer
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Why can't marginal CVA be used in pricing?

"Marginal CVA may be useful to breakdown a CVA for any number of netted trades into trade-level contributions that sum to the total CVA. Whilst it might not be used for pricing new transactions (due ...
AfterWorkGuinness's user avatar
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CVA for an inflation linked swap

I am trying to value an inflation linked swap and wish to calculate the associated CVA and DVA. I think the best way to approach this would be via a simulation. Suppose I wish to calculate CVA over ...
user184342.ru's user avatar
2 votes
1 answer
2k views

How are netting sets determined for CVA calculation?

In his book, Gregory describes a netting set as a set of trades that can be legally netted together in the event of a default Obviously, the netting agreements (as per ISDA master agreement) ...
eddiewould's user avatar
3 votes
3 answers
7k views

How do right-to-break clauses affect CVA calculations

Does the presence of a optional/mandatory right-to-break clause affect CVA calculations, and if so, how? Given two (otherwise identical) 10y swaps with the same counterparty, one of which has a right ...
eddiewould's user avatar
5 votes
1 answer
2k views

How to estimate CVA by valuing a CDS of the counterparty?

I'm trying to estimate CVA of one of my derivatives by valuing a credit default swap (CDS) of my counterparty. However, I don't know how to set up the CDS deal (notional amount, maturity, etc.). ...
Carlos F.'s user avatar
3 votes
2 answers
355 views

CVA/CDVA - Worsened Credit Quality implies profit?

In the book Counterparty Credit Risk, Collateral and Funding by Brigo et al I found the following: credit quality of investor WORSENS $\Rightarrow$ books POSITIVE MARK TO MKT credit quality of ...
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CVA formula proof

I'm struggling to prove the CVA formula in this paper. Equation (3) is the result of computing the expectation of formula (1). Could you please show me how to prove that?
David's user avatar
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CVA number used by Finance Team

What are different reasons, Finance Team will need CVA number for? Is there any specific regulatory reporting to be done?
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