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10 votes
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Parametrizing the Radon Nikodym

@Gordon, here is how I would interpret this excerpt. Assume that the discussion starts with $\bf{SALVA}$ explaining to $\bf{SAGE}$ that, in the absence of arbitrage opportunities, it is always ...
Quantuple's user avatar
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5 votes

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

"Debt issuer default risk" and "counterparty risk" are very similar. From Risk magazine: Counterparty Risk The risk that a counterparty to a transaction or contract will default (...
Daneel Olivaw's user avatar
4 votes
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seek clarification about PFE

Potential future exposure (PFE) is a concept in credit analysis, that is we are investigating the risk that a counterparty will not be able to pay us in the future. In a typical derivative deal ...
nbbo2's user avatar
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4 votes
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References for Counterparty Credit Risk, especially derivatives exposure

Giovanni Cesari, John Aquilina, Niels Charpillon, Zlatko Filipovic, Gordon Lee, Ion Manda. Modelling, Pricing, and Hedging Counterparty Credit Exposure: A Technical Guide (2009) Eduardo Canabarro. ...
Dimitri Vulis's user avatar
3 votes

CVA formula for a call option

No need to overcomplexify things. The CVA gives you simply the amount that you expect to lose if and when your counterparty defaults, discounted to today. In your case, you are buying an option. So, ...
byouness's user avatar
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3 votes
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How to calculate the CVA of a forward contract?

Actually the problem is that the probability of default the second year is conditioned by the default the first year. So you have to multiply 4%*101.21*99%, because 1% of the times it has already ...
oscar's user avatar
  • 54
2 votes
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Bilateral Counterparty risk

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 ...
AFK's user avatar
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2 votes
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Potential Future Exposure (PFE): Is there any Rigorous Walk Through with Data?

I think PFE is covered well in Jon Gregory's book. Have a look at his website, he has spreadsheets on how PFE can be calculated. In 2nd Edition its in Chapter 8. If you happen to have the 3rd Edition ...
AK88's user avatar
  • 1,840
2 votes

sign of CVA (Credit Value Adjustment)

This was originally meant as a comment but was too long to be considered as such. It's all a matter of convention but I would agree with you that there is a sign problem. If you look at it from the ...
Quantuple's user avatar
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2 votes
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Cash account growth in Burgard & Kjaer (2011)

Following further analysis, the results derived by Burgard and Kjaer rely on the assumption that the funding of the asset $S$ and the counterparty bond $P_C$ is fully achieved through the repo market, ...
Daneel Olivaw's user avatar
2 votes

References for Counterparty Credit Risk, especially derivatives exposure

Schönbucher, P., & Schubert, D. (2001). Copula-Dependent Defaults in Intensity Models. Working Paper, Bonn University. Terentyev, S. (2004). Asymmetric counterparty relations in default modeling. ...
stans's user avatar
  • 272
2 votes

What does the NPV of a CVA trade tell you

The NPV of a trade done by the CVA desk seems like a red herring. After all, a typical trade done by them is to buy a CDS on the counter party as reference entity, but like all derivatives trades ...
dm63's user avatar
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2 votes
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What is a counterparty risk trading desk

It is the desk responsible for evaluating scenarios corresponding to the action of counterparties (to existing contracts) failing. Their job is risk assessment and risk mitigation via strategies such ...
Attack68's user avatar
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1 vote

Zero-recovery swap / extinguisher swap

Counterparties A and B have a cross-currency swap that disappears (extinguishes) if credit C has a CDS-like credit event. The underlying swap could be physical delivery or non-delivery; or many other ...
Dimitri Vulis's user avatar
1 vote

seek clarification about PFE

The higher the value of the contract, the higher the counterparty credit risk the bank's is taking from that contract. That's why banks set PFE limits to each counterparty.
SuavestArt's user avatar
1 vote

References for Counterparty Credit Risk, especially derivatives exposure

I strongly recommend starting with this: Zhu, Steven and Pykhtin, Michael (2008). ”A Guide to Modeling Counterparty Credit Risk”, GARP Risk Review This should introduce you to all necessary ...
Daneel Olivaw's user avatar
1 vote

In a cleared inflation swap agreement, what determines how much "collateral" a party needs to deposit into the third party escrow account?

I think this is not an inflation specific question, isn't it. The same question can apply to interest swap. And I assume by inflation swap, you mean zero coupon inflation swap(ZCIS). The margin is ...
Peaceful's user avatar
  • 734
1 vote

Exposure calculation of a re-coupon swap

If the MtM is settled and the fixed rate reset every period, then the exposure in the future is at most the BPV times the swap rate change over one period, easily modeled within any interest rate ...
Antoine Conze's user avatar
1 vote

How to calculate the CVA of a forward contract?

The calculations are correct; I played a little with the parameters and it seems that the risk free rate is not 2%, but 2.5%. Given this input, the exposures are 125.23 and 167.01, as given in the ...
SkorohodAlex's user avatar

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