Rethinking Valuation and Pricing Models

6

Counterparty Credit Risk and Credit Valuation Adjustments (CVAs) for Interest Rate Derivatives–Current Challenges for CVA Desks

Birgitta Drwenski^∗, Jochen Beißer^∗∗ and Lutz Mangels^∗∗∗

^∗CFA, Diplom Volkswirtin

^∗∗Department of Business Administration, University of Applied Sciences RheinMain

^∗∗∗FRM, Master of Business Administration

Chapter Outline

6.1 Introduction

6.2 Traditional Counterparty Risk Management Approaches

6.3 Modeling Credit Exposure and Pricing CCR

6.3.1 Credit exposure on a derivative

6.3.2 Determination of future credit exposure

6.3.2.1 Step 1: Scenario generation

6.3.2.2 Step 2: Instrument valuation and exposure profiles

6.3.2.3 Step 3: Portfolio aggregation

6.3.3 Calculation of CVAs

6.3.4 Wrong way risk

6.3.5 Parameter availability ...