Credit Valuation Adjustment (CVA)

by Shahram Alavian of Lehman Brothers,
Jie Ding of Nomura,
Peter Whitehead of Deutsche Bank, and
Leonardo Laudicina of Nomura

October 9, 2010

Abstract: This paper provides an overview of counterparty valuation adjustments, within the context of collateralized and un-collateralized trading relationships. The counterparty valuation adjustment terms are derived by decomposing an un-defaultable portfolio into a set of binary states. These states are a set of market values of the portfolio (positive or negative), default states (default or no default) and recoveries (recover the recovery amount or not). In particular, the asset charge and liability benefit are formulated for both un-collateralized and collateralized portfolios while different models are provided for the collateral transfer calculations of the collateralized trading accounts.

Keywords: counterparty risk, CVA, counterparty value adjustment.

Previously titled: Counterparty Valuation Adjustment (CVA)

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