Counterparty Credit Risk on a Standard Swap in ¡°Risky Closeout¡±

Wei Wei

International Journal of Financial Research, 2011, vol. 2, issue 2, 40-51

Abstract: This paper provides risky closeout amount in computing counterparty credit risk. Under this closeout, we obtain a new nonlinear PDE model describing the value of a standard interest swap with counterparty credit risk in the reduced form framework, thus get a new method to calculate counterparty credit valuation adjustment. We solve the nonlinear PDE by iterations numerically and prove the convergence of this approach. By numerical examples, we show the difference between risky closeout and conventional closeout in estimating counterparty credit risk.

Keywords: Counterparty credit risk; Counterparty credit valuation adjustment; Interest swap; Nonlinear PDE (search for similar items in EconPapers)
Date: 2011
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