An Accurate Solution for Credit Value Adjustment (CVA) and Wrong Way Risk

Tim Xiao

MPRA Paper from University Library of Munich, Germany

Abstract: This paper presents a new framework for credit value adjustment (CVA) that is a relatively new area of financial derivative modeling and trading. In contrast to previous studies, the model relies on the probability distribution of a default time/jump rather than the default time itself, as the default time is usually inaccessible. As such, the model can achieve a high order of accuracy with a relatively easy implementation. We find that the prices of risky contracts are normally determined via backward induction when their payoffs could be positive or negative. Moreover, the model can naturally capture wrong or right way risk.

Keywords: credit value adjustment (CVA); wrong way risk; right way risk; credit risk modeling; risky valuation; default time approach (DTA); default probability approach (DPA); collateralization; margin and netting. (search for similar items in EconPapers)
JEL-codes: E44 G12 G32 G33 (search for similar items in EconPapers)
Date: 2013-05-01
New Economics Papers: this item is included in nep-ban, nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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https://mpra.ub.uni-muenchen.de/86715/8/MPRA_paper_86715.pdf revised version (application/pdf)

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