White Papers
BUILDING CVA ON TOP OF AN EXISTING RISK INFRASTRUCTURE
A credit value adjustment (CVA) captures the counterparty default risk inherent in Over The Counter (OTC) derivatives portfolios. In a sense, the CVA is similar to loss reserves made on loan portfolios; on the other hand CVA is a highly volatile figure that depends directly on fluctuating daily market prices.
This paper considers:
- The drivers behind CVA
- The different approaches that banks can adopt in
- response to these drivers
- The technology implications of each of these strategies
The potential cost of doing business with certain counterparties is now a significant concern for anyone trading in the financial markets. In the past, the valuation of counterparty credit risk (CCR) was largely ignored, thanks to the relatively small size of derivatives exposures and the high credit rating of the counterparties involved - in general, other highly rated financial institutions. As the size of derivatives exposure increased and the credit quality of the counterparties fell in the wake of the 2008 crisis, however, the valuation of counterparty credit risk could no longer be assumed to be negligible and had to be priced in.
This paper explains the 'CVA landscape' and clarifies the different notions of CVA that currently prevail. It provides practical help for banks looking to implement CVA projects effectively.
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