Pricing counterparty risk at the trade level and CVA allocations

Michael Pykhtin and Dan Rosen
Additional contact information
Michael Pykhtin: https://www.federalreserve.gov/econres/michael-v-pykhtin.htm

No 2010-10, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We address the problem of allocating the counterparty-level credit valuation adjustment (CVA) to the individual trades composing the portfolio. We show that this problem can be reduced to calculating contributions of the trades to the counterparty-level expected exposure (EE) conditional on the counterparty's default. We propose a methodology for calculating conditional EE contributions for both collateralized and non-collateralized counterparties. Calculation of EE contributions can be easily incorporated into exposure simulation processes that already exist in a financial institution. We also derive closed-form expressions for EE contributions under the assumption that trade values are normally distributed. Analytical results are obtained for the case when the trade values and the counterparty's credit quality are independent as well as when there is a dependence between them (wrong-way risk).

Keywords: Financial risk management; Derivative securities (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-ban and nep-rmg
References: View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://www.federalreserve.gov/pubs/feds/2010/201010/201010abs.html (text/html)
http://www.federalreserve.gov/pubs/feds/2010/201010/201010pap.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2010-10

Access Statistics for this paper

More papers in Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().