6 votes

MVA, initial margin valuation adjustment for derivatives

The name initial margin is somewhat misleading as initial margin is dynamic i.e it is adjusted through time. So, as you say, on day zero, it can be computed as a 10 day VaR VaR(10, t0). But, on day ...
user25205's user avatar
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

Credit Valuation adjustment (CVA) Hedges

To continue from uness' answer (edit: just seen the OP was very old, but will leave here anyway!) . The greeks will be every element of market risk to which the the CVA is sensitive. Writing in words ...
Mehness's user avatar
  • 533
4 votes

Credit Valuation adjustment (CVA) Hedges

CVA is a price. Just like any price, you compute its sensitivities (greeks) and then use financial products to bring them as close to zero as possible. It's not possible to derive a hedging strategy ...
byouness's user avatar
  • 2,210
4 votes
Accepted

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

Assuming zero recovery, let $\mathcal{C}$ be a counterparty you are facing on a derivative deal with value $V(t)$ and maturity $T$ such that $V(t)\geq 0$, for example an option. Let $CDS_\mathcal{C}(t,...
Daneel Olivaw's user avatar
4 votes

Why xVA is only applicable to derivatives contracts

I don’t think it is exactly correct to say that XVA only apply to derivatives. It is more correct to say they are more relevant to derivatives than cash products such as loans. The reason is that in ...
TDC's user avatar
  • 41
4 votes

CVA for options

To expand on Quantuple's comments: Default probability The CVA is the price adjustment to take into account the default of the counterpart. So, it is obtained by taking the sum of future expected ...
byouness's user avatar
  • 2,210
4 votes

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

CVA stands for Credit Valuation Adjustment and should be applied to derivatives and not bond portfolios. The reason is that unlike derivatives, a bond has the counterparty credit quality implicitly ...
David Duarte's user avatar
  • 5,815
3 votes
Accepted

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

For a very nice reference on this matter, I recommend Pykhtin and Zhu’s Guide to Modelling Counterparty Credit Exposure, a short paper that thoroughly defines these concepts. Expected Exposure $EE(t)$...
Daneel Olivaw's user avatar
3 votes

Why xVA is only applicable to derivatives contracts

You are right, there's not much difference. I think the reason people don't talk about it that way is due to accounting. Derivatives are marked to market (thus requiring an accurate estimate of ...
dm63's user avatar
  • 17k
3 votes
Accepted

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
3 votes
Accepted

How to compute the CVA on a swap with SPV?

The assets of the SPV constitute a single corporate loan. Therefore the probability of default and LGD of the bond can be estimated from the CDS market for that corporate. Now the SPV defaults if ...
dm63's user avatar
  • 17k
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
  • 2,210
3 votes

Discounting for XVA

Libor, besides its name, is not a good proxy for uncollateralised funding. In fact, a large bank I worked for had an uncollateralised funding curve which was a a spread of +100bps to Libor. The fact ...
Attack68's user avatar
  • 10.2k
3 votes

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

The CVA on a cross currency swap comes mostly from the final exchange (being the biggest flow). If you as an end user are paying the EUR, then the bank is receiving the EUR a d paying the USD. They ...
dm63's user avatar
  • 17k
3 votes
Accepted

Understanding the cost involved in collateralization of existing OTC business

I think that the negotiating space is to ask how much will D have to pay (not receive). The dominant economic effect is that C will have to send collateral to D, which is really the same as saying ...
dm63's user avatar
  • 17k
2 votes

cva for a collateralised swap

Collateral imperfections: the CVA cover the expected exposure in the event that the counterparty defaults. When the trade is collateralized and subject to variation margin. This exposure will come ...
byouness's user avatar
  • 2,210
2 votes
Accepted

What is CVA (credit valuation adjustment)?

If you have a portfolio of derivatives with a counterparty and this counterparty defaults before the trades mature, the net mark to market value of the portfolio will be calculated according to the ...
Adam N.'s user avatar
  • 36
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
  • 14.6k
2 votes
Accepted

conditional expectation formula of default in CVA

Note that, for any $u > 0$, \begin{align*} E^Q(1_{\tau > u} \mid \mathscr{F}_u) = e^{-\int_0^u \lambda(s)ds}. \end{align*} For example, given $\lambda$, we can define the default time $\tau$ as \...
Gordon's user avatar
  • 21.1k
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
  • 17k
1 vote

Counterparty exposure for a swap

What you are describing is a payer swaption expiring in 15 months, with the strike being 1% above the current at the money forward swap rate for a forward starting swap where the swap starts 2yrs from ...
AlRacoon's user avatar
  • 6,447
1 vote
Accepted

Should one calculate CVA even when exposure is negative?

Indeed, if the collateral is not segregated, it could be lost if the counterpart defaults. So, the credit exposure should be computed taking into account the collateral balance $C(t)$: $$ Exposure(t) ...
byouness's user avatar
  • 2,210
1 vote

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

You’re missing an important term in your expression for CVA, the recoverability of assets in the case of default. Since this value can be difficult to estimate, it’s possible to incorrectly compute ...
vrume21's user avatar
  • 169
1 vote
Accepted

Credit Value Adjustment

The approach is the same in discrete and continuous time. You have $$\text{CVA} = E\left[e^{-\int_0^{\tau} r_u du} \text{EAD}_{\tau} (1-R)\mathbf{1}_{\tau \leq T}\right]$$ where $\tau$ = ...
Antoine Conze's user avatar
1 vote

In CVA simulation, timesteps vs number of simulations?

Depends on the portfolio, know that is not very helpful! So here is a simple test. Try a reasonable base, say 100 times 10k, then increase the number of timesteps, see how much the results change by, ...
Magic is in the chain's user avatar
1 vote

Collateralized / uncollateralized swap

The pre-crisis concept of a risk-free rate was either government securities or LIBOR-based swap rates. As LIBOR is unsecured bank borrowing-lending rate, this was clearly an approximation too far. ...
rrg's user avatar
  • 969
1 vote
Accepted

Collateralized / uncollateralized swap

1. Discount Yes, usually, people discount using the risk free rate, and then adjust for the counterparty credit risk (CVA), funding cost (FVA), and so on. 2. Collateral The Margin period of risk: ...
byouness's user avatar
  • 2,210
1 vote

Why xVA is only applicable to derivatives contracts

For a portfolio of loans, the expected loss is considered as a cost and not a risk. Usually, one would compute this expected loss, price it in the loan's interest and set it aside (provision). The ...
byouness's user avatar
  • 2,210
1 vote

MVA, initial margin valuation adjustment for derivatives

Unlike VM which covers MtMs , IM covers close-out risk (2 weeks portfolio volatility)., it is dynamic , and required for major OTC users (see BCBS IOSCO 2015 ) i.e top up segregated account if need be ...
DKK's user avatar
  • 250

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