Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/102579
Authors: 
Černý, Jakub
Witzany, Jiří
Year of Publication: 
2014
Series/Report no.: 
IES Working Paper 16/2014
Abstract: 
The credit valuation adjustment (CVA) of OTC derivatives is an important part of the Basel III credit risk capital requirements and current accounting rules. Its calculation is not an easy task - not only it is necessary to model the future value of the derivative, but also the probability of default of a counterparty. Another complication arises in the calculation when the exposure to a counterparty is adversely correlated with the credit quality of that counterparty, i.e. when it is needed to incorporate the wrong-way risk. A semi-analytical CVA formula simplifying the interest rate swap (IRS) valuation with the counterparty credit risk including the wrong-way risk is derived and analyzed in the paper. The formula is based on the fact that the CVA of an IRS can be expressed using swaption prices. The link between the interest rates and the default time is represented by a Gaussian copula with constant correlation coefficient. Finally, the results of the semi-analytical approach are compared with the results of a complex simulation study.
Subjects: 
Counterparty Credit Risk
Credit Valuation Adjustment
Wrong-way Risk
Risky Swaption Price
Semi-analytical Formula
Interest Rate Swap Price
JEL: 
C63
G12
G13
G32
Document Type: 
Working Paper
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