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Credit Value Adjustment

Ahlberg, Johan (2013) In Master's Theses in Mathematical Sciences FMS820 20132
Mathematical Statistics
Abstract (Swedish)
In this thesis the topic Counterparty Credit Risk in OTC derivative transactions
is described and the pricing component arising from it, i.e., the Credit Value Adjustment
(CVA), is discussed. The unilateral CVA and DVA are derived in the case
where one party engaging in a transaction is assumed to be defaultable and bilateral
CVA is derived in the case where both parties in a transaction are assumed to
be defaultable. In this context hedging aspects are also examined and risk-neutral
pricing of CVA is discussed.
The set-up of a numerical tool for CVA computations is then described and
a simple tool for computing CVA for single interest rate swaps is developed. In
connection the input data needed for the computations is discussed... (More)
In this thesis the topic Counterparty Credit Risk in OTC derivative transactions
is described and the pricing component arising from it, i.e., the Credit Value Adjustment
(CVA), is discussed. The unilateral CVA and DVA are derived in the case
where one party engaging in a transaction is assumed to be defaultable and bilateral
CVA is derived in the case where both parties in a transaction are assumed to
be defaultable. In this context hedging aspects are also examined and risk-neutral
pricing of CVA is discussed.
The set-up of a numerical tool for CVA computations is then described and
a simple tool for computing CVA for single interest rate swaps is developed. In
connection the input data needed for the computations is discussed and a method
for constructing proxy CDS spread curves, where there is a lack of quoted CDS
spreads referenced to a particular counterparty in the market, is described.
As a second part the relation between CVA from a regulatory perspective, driven
by the CVA capital charge introduced in the third Basel accord, CVA from an
accounting perspective, driven by IFRS, and CVA from a market perspective, as a
potentially tradeable asset, is discussed. In connection to this the standardised and
the advanced approaches to computing the CVA capital charge are examined and
the similarities and dierences to the market CVA are claried. The implications
of implementing CVA in the pricing of OTC derivatives within a bank are nally
discussed. (Less)
Please use this url to cite or link to this publication:
author
Ahlberg, Johan
supervisor
organization
course
FMS820 20132
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Basel III, Bilateral CVA, Counterparty credit risk, Credit value adjustment, CVA, CVA capital charge, DVA, OTC derivatives.
publication/series
Master's Theses in Mathematical Sciences
report number
LUTFMS-3228-2013
ISSN
1404-6342
other publication id
2013:E52
language
English
id
4057708
date added to LUP
2013-09-24 11:04:53
date last changed
2024-10-18 17:04:29
@misc{4057708,
  abstract     = {{In this thesis the topic Counterparty Credit Risk in OTC derivative transactions
is described and the pricing component arising from it, i.e., the Credit Value Adjustment
(CVA), is discussed. The unilateral CVA and DVA are derived in the case
where one party engaging in a transaction is assumed to be defaultable and bilateral
CVA is derived in the case where both parties in a transaction are assumed to
be defaultable. In this context hedging aspects are also examined and risk-neutral
pricing of CVA is discussed.
The set-up of a numerical tool for CVA computations is then described and
a simple tool for computing CVA for single interest rate swaps is developed. In
connection the input data needed for the computations is discussed and a method
for constructing proxy CDS spread curves, where there is a lack of quoted CDS
spreads referenced to a particular counterparty in the market, is described.
As a second part the relation between CVA from a regulatory perspective, driven
by the CVA capital charge introduced in the third Basel accord, CVA from an
accounting perspective, driven by IFRS, and CVA from a market perspective, as a
potentially tradeable asset, is discussed. In connection to this the standardised and
the advanced approaches to computing the CVA capital charge are examined and
the similarities and dierences to the market CVA are claried. The implications
of implementing CVA in the pricing of OTC derivatives within a bank are nally
discussed.}},
  author       = {{Ahlberg, Johan}},
  issn         = {{1404-6342}},
  language     = {{eng}},
  note         = {{Student Paper}},
  series       = {{Master's Theses in Mathematical Sciences}},
  title        = {{Credit Value Adjustment}},
  year         = {{2013}},
}