Rethinking Valuation and Pricing Models

5

Credit Valuation Adjustments– Mathematical Foundations, Practical Implementation and Wrong Way Risks

Marcus R.W. Martin^∗ and Stefan Reitz^∗∗

^∗Darmstadt University of Applied Sciences, Competence Center Stochastics and Operations Research (CCSOR)

^∗∗University of Applied Sciences, Stuttgart

Chapter Outline

5.1 Introduction

5.2 Mathematical Foundations of CVA

5.2.1 Notation and basics from derivatives pricing theory

5.2.2 CCR and CVA

5.3 Practical Implementation: Issues and (Wrong Way) Risks

5.3.1 Practical implementation—open issues and risks

5.3.2 Case study on the impact of WWR

5.3.2.1 Scenario generation—with and without WWR

5.3.2.2 Expected positive exposure, alpha and (unilateral) CVA

5.3.2.3 Outlook

5.4 Model Risks in CVA Calculation

5.5 Summary ...