the web's biggest credit risk modeling resource.

Credit Jobs

Home Glossary Links FAQ / About Site Guide Search


Submit Your Paper

In Rememberance: World Trade Center (WTC)

doi> search: A or B

Export citation to:
- Text (plain)
- BibTeX

Pricing Counterparty Risk at the Trade Level and CVA Allocations

by Michael Pykhtin of the Federal Reserve Board, and
Dan Rosen of R2 Financial Technologies and the Fields Institute

November 2009

Abstract: We address the problem of allocating the counterparty-level credit valuation adjustment (CVA) to the individual trades composing the portfolio. We show that this problem can be reduced to calculating contributions of the trades to the counterparty-level expected exposure (EE) conditional on the counterparty's default. We propose a methodology for calculating conditional EE contributions for both collateralized and non-collateralized counterparties. Calculation of EE contributions can be easily incorporated into exposure simulation processes that already exist in a financial institution. We also derive closed-form expressions for EE contributions under the assumption that trade values are normally distributed. Analytical results are obtained for the case when the trade values and the counterparty's credit quality are independent as well as when there is a dependence between them (wrong-way risk).

Keywords: CVA, counterparty risk, derivatives, credit exposure, Euler allocations, simulation, wrong-way risk.

Books Referenced in this paper:  (what is this?)

Download paper (504K PDF) 36 pages