CVA-VaR

by Shahram Alavian of Royal Bank of Scotland, and
Etienne Koehler of University of Paris-1

December 13, 2011

Abstract: This paper proposes a VaR methodology for CVA incorporating the variation of both the credit and the exposures. By obtaining the forward distributions of expected exposures and CVAs at a time horizon of less than one-day into the future, this paper proposes a scheme that can be used for calculating the VaR on CVA. The method is applied to cases where both exposures and hazard rates are simultaneously simulated (Method-I) and in cases where the exposure is simulated in isolation from the credit states (Method-II). In both cases, the variations that are needed for the final calculations of VaR are modeled using linear regression against the changes in the driving risk factors, therefore, requiring only one simulation run. therefore, requiring only one simulation run.

Keywords: CVA, VaR, CVA Capital Charge.

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