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CRMM-15-pricing-counterparty-credit-risk-1.html
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<title>Credit Risk Measurement and Management | Chapter 15 | Pricing Counterparty Credit Risk, 1</title>
<meta name="description" content="Financial Risk Manager Part 2 Study Materials">
<meta name="author" content="MacLane Wilkison">
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<h1>Chapter 15</h1>
<h3>Pricing Counterparty Credit Risk, 1</h3>
<p>
<small>Created for <a href="http://alchemistsacademy.com">Alchemists Academy</a> by <a href="http://alchemistsacademy.com/about">MacLane Wilkison</a></small>
</p>
</section>
<section>
<h2>Pricing Counterparty Risk</h2>
<ul>
<li>Bilateral nature of credit exposure makes counterparty risk difficult to quantify</li>
<li>Credit value adjustment (CVA) - measures counterparty risk via a combination of:
<ul>
<li>The current risk-free value of the transaction(s)</li>
<li>A term representing the counterparty risk of the positions is subtracted out</li>
<li>CVA (assuming no wrong-way risk) ≈ Loss given default × Sum of (Discount factors × Expected exposure × Default probability)</li>
<li>CVA spread = CVA(t,T)/CDS<sub>premium</sub>(t,T) = X<sup>CDS</sup> × EPE</li>
</ul>
</ul>
<aside class="notes">
For CVA spread: CDS<sub>premium</sub>(t,T) is the unit premium value of a CDS and X<sup>CDS</sup> is the CDS premium corresponding to the maturity date T.
</aside>
</section>
<section>
<h2>Bilateral Counterparty Risk</h2>
<p>Bilateral CVAs are calculated under the assumption that both parties may default</p>
</section>
<section>
<h1>THE END</h1>
<h3><a href="http://alchemistsacademy.com">AlchemistsAcademy.com</a></h3>
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