CVA UNDER ALTERNATIVE SETTLEMENT CONVENTIONS AND WITH SYSTEMIC RISK

Cyril Durand () and Marek Rutkowski ()
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Cyril Durand: Department of Mathematics, Imperial College, London SW7 2AZ, United Kingdom
Marek Rutkowski: School of Mathematics and Statistics, University of Sydney, Sydney, NSW 2006, Australia

International Journal of Theoretical and Applied Finance (IJTAF), 2013, vol. 16, issue 07, 1-40

Abstract: We propose a fairly general framework which allows one to perform Credit Value Adjustment (CVA) computations for a contract with bilateral counterparty risk in the presence of (a) systemic risk and (b) wrong-way or right-way risks. Our methodology focuses on the role of alternative settlement clauses, but it also aims to cover various features of margin agreements. We present a comparative analysis of numerical results that supports our initial conjecture that alternative specifications of settlement values have a nonnegligible impact on CVA computations for contracts with bilateral counterparty risk. Our conclusions emphasize the practical importance of more sophisticated models that are capable of fully reflecting the actual features of financial contracts, as well as the influence of the market environment.

Keywords: Credit risk; counterparty risk; credit value adjustment; margin agreement; systemic risk; Markovian model (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (4)

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DOI: 10.1142/S0219024913500398

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