Valuing Interest Rate Swaps with CVA and DVA

Donald J Smith

Chapter 5 in Valuation in a World of CVA, DVA, and FVA:A Tutorial on Debt Securities and Interest Rate Derivatives, 2017, pp 93-136 from World Scientific Publishing Co. Pte. Ltd.

Abstract: The valuation of an interest rate swap in a world of XVA is particularly important because credit risk is bilateral on this type of derivative contract, unlike the unilateral credit risk on a debt security or an interest rate cap or floor. At issuance, the typical interest rate swap has a value of zero; it is known as an at-market or par swap. Subsequently, as time passes and as market rates change, the value of the swap becomes positive to one of the two counterparties and negative to the other. It is also possible for the value of the swap to change sign during its lifetime — what was once an asset can switch on a future date to the other side of the balance sheet to become a liability, and vice versa. Therefore, both the CVA (the credit risk of the counterparty) and the DVA (the party’s own credit risk) matter in valuation. Another of the XVA, in particular, the FVA (the funding valuation adjustment) is addressed in the next chapter…

Keywords: XVA; CVA; DVA; FVA; Debt Securities; Interest Rate Derivatives (search for similar items in EconPapers)
JEL-codes: G10 (search for similar items in EconPapers)
Date: 2017
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