A note on CVA and wrong way risk

Roberto Baviera, Gaetano La Bua and Paolo Pellicioli
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Roberto Baviera: Department of Mathematics, Politecnico di Milano, 32 p.zza Leonardo da Vinci, I-20133 Milano, Italy
Gaetano La Bua: Department of Mathematics, Politecnico di Milano, 32 p.zza Leonardo da Vinci, I-20133 Milano, Italy
Paolo Pellicioli: #x2020;Intesa Sanpaolo Vita S.p.A., 55/57 Viale Stelvio, I-20159 Milano, Italy

International Journal of Financial Engineering (IJFE), 2016, vol. 03, issue 02, 1-14

Abstract: Hull and White approach to Wrong Way Risk in the computation of Credit Value Adjustment (CVA) is considered the most straightforward generalization of the standard Basel approach. The model is financially intuitive and it can be implemented by a slight modification of existing algorithms for CVA calculation. However, path dependency in the key quantities has non-elementary consequences in the calibration of model parameters. We propose a simple and fast approach for computing these quantities via a recursion formula. We show in detail the calibration methodology on market data and CVA computations in two relevant cases: a FX forward and an interest rate swap.

Keywords: Credit value adjustment; Basel III CVA capital charges; path dependency valuation; model calibration (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S2424786316500122

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