Wrong Way Risk corrections to CVA in CIR reduced-form models

Fabio Antonelli (), Alessandro Ramponi () and Sergio Scarlatti ()
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Fabio Antonelli: University of L’Aquila
Alessandro Ramponi: University of Rome Tor Vergata
Sergio Scarlatti: University of Rome Tor Vergata

Computational Management Science, 2023, vol. 20, issue 1, No 46, 28 pages

Abstract: Abstract In this paper we provide an efficient methodology to compute the credit value adjustment of a European contingent claim subject to some default event concerning the issuer solvability, when the underlying and the default event are correlated. In particular, in a Black and Scholes market/CIR intensity-default model, we consider a second order expansion around the origin of a vulnerable call option with respect to a correlation parameter $$\rho$$ ρ , which may be used to describe the wrong way risk of the contract, measuring the dependence between the underlying asset price and the option’s issuer default intensity. Numerical implementations of this approach are compared with the benchmark Monte Carlo simulations.

Keywords: Credit value adjustment; Vulnerable options; Counterparty credit risk; Wrong way risk (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s10287-023-00480-0

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