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Computing valuation adjustments for counterparty credit risk using a modified supervisory approach

Author

Listed:
  • Patrick Büchel

    (Commerzbank AG)

  • Michael Kratochwil

    (Universität Regensburg
    Dr. Nagler & Company GmbH)

  • Daniel Rösch

    (Universität Regensburg)

Abstract

Considering counterparty credit risk (CCR) for derivatives using valuation adjustments (CVA) is a fundamental and challenging task for entities involved in derivative trading activities. Particularly calculating the expected exposure is time consuming and complex. This paper suggests a fast and simple semi-analytical approach for exposure calculation, which is a modified version of the new regulatory standardized approach (SA-CCR). Hence, it conforms with supervisory rules and IFRS 13. We show that our approach is applicable to multiple asset classes and derivative products, and to single transactions as well as netting sets.

Suggested Citation

  • Patrick Büchel & Michael Kratochwil & Daniel Rösch, 2020. "Computing valuation adjustments for counterparty credit risk using a modified supervisory approach," Review of Derivatives Research, Springer, vol. 23(3), pages 273-322, October.
    • Handle: RePEc:kap:revdev:v:23:y:2020:i:3:d:10.1007_s11147-019-09165-w
    DOI: 10.1007/s11147-019-09165-w
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    References listed on IDEAS

    as
    1. Anders B. Trolle & Eduardo S. Schwartz, 2009. "A General Stochastic Volatility Model for the Pricing of Interest Rate Derivatives," The Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 2007-2057, May.
    2. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-343.
    3. Lie-Jane Kao, 2016. "Credit valuation adjustment of cap and floor with counterparty risk: a structural pricing model for vulnerable European options," Review of Derivatives Research, Springer, vol. 19(1), pages 41-64, April.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Counterparty credit risk; Credit valuation adjustments (CVA); Credit exposure; Standardized approach for measuring counterparty credit risk exposures (SA-CCR);
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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