CVA/DVA wrong way risk put into practice
To account for counterparty default risk it is now common to require a credit valuation adjustment (CVA) charge. The standard CVA approach, which is also advocated by the Basel III rules, ignores potential dependencies between the client’s default probability and the exposure at default, which can either be in disadvantage or favor (wrong or right way risk) for the dealer. We propose a CVA formula that accounts for these dependencies and is easily put into practice since it stays closely to the standard simulation based CVA implementations and requires no additional simulation effort.
Key words: counterparty default, credit valuation adjustment (CVA), debt valuation adjustment (DVA), wrong way risk, correlationZurück zu "Publications"