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Counterparty Risk FAQ: Credit VaR, PFE, CVA, DVA, Closeout, Netting, Collateral, Re-hypothecation, WWR, Basel, Funding, CCDS and Margin Lending

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  • Damiano Brigo

Abstract

We present a dialogue on Counterparty Credit Risk touching on Credit Value at Risk (Credit VaR), Potential Future Exposure (PFE), Expected Exposure (EE), Expected Positive Exposure (EPE), Credit Valuation Adjustment (CVA), Debit Valuation Adjustment (DVA), DVA Hedging, Closeout conventions, Netting clauses, Collateral modeling, Gap Risk, Re-hypothecation, Wrong Way Risk, Basel III, inclusion of Funding costs, First to Default risk, Contingent Credit Default Swaps (CCDS) and CVA restructuring possibilities through margin lending. The dialogue is in the form of a Q&A between a CVA expert and a newly hired colleague.

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File URL: http://arxiv.org/pdf/1111.1331
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Bibliographic Info

Paper provided by arXiv.org in its series Papers with number 1111.1331.

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Date of creation: Nov 2011
Date of revision: Jun 2012
Handle: RePEc:arx:papers:1111.1331

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Web page: http://arxiv.org/

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References

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  1. Damiano Brigo & Kyriakos Chourdakis, 2009. "Counterparty Risk For Credit Default Swaps: Impact Of Spread Volatility And Default Correlation," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 12(07), pages 1007-1026.
  2. Jones, E Philip & Mason, Scott P & Rosenfeld, Eric, 1984. " Contingent Claims Analysis of Corporate Capital Structures: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 39(3), pages 611-25, July.
  3. Biffis, Enrico & Blake, David & Pitotti, Lorenzo & Sun, Ariel, 2011. "The cost of counterparty risk and collateralization in longevity swaps," MPRA Paper 35740, University Library of Munich, Germany.
  4. Damiano Brigo & Andrea Pallavicini & Vasileios Papatheodorou, 2011. "Arbitrage-Free Valuation Of Bilateral Counterparty Risk For Interest-Rate Products: Impact Of Volatilities And Correlations," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 14(06), pages 773-802.
  5. Damiano Brigo & Marco Tarenghi, 2009. "Credit Default Swap Calibration and Equity Swap Valuation under Counterparty Risk with a Tractable Structural Model," Papers 0912.3028, arXiv.org.
  6. Albanese, Claudio & Brigo, Damiano & Oertel, Frank, 2013. "Restructuring counterparty credit risk," Discussion Papers 14/2013, Deutsche Bundesbank, Research Centre.
  7. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
  8. Damiano Brigo & Andrea Pallavicini & Vasileios Papatheodorou, 2009. "Bilateral counterparty risk valuation for interest-rate products: impact of volatilities and correlations," Papers 0911.3331, arXiv.org, revised Feb 2010.
  9. Fisher, Lawrence, 1984. " Contingent Claims Analysis of Corporate Capital Structures: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 39(3), pages 625-27, July.
  10. Damiano Brigo & Aurélien Alfonsi, 2005. "Credit default swap calibration and derivatives pricing with the SSRD stochastic intensity model," Finance and Stochastics, Springer, vol. 9(1), pages 29-42, January.
  11. Damiano Brigo & Agostino Capponi & Andrea Pallavicini & Vasileios Papatheodorou, 2011. "Collateral Margining in Arbitrage-Free Counterparty Valuation Adjustment including Re-Hypotecation and Netting," Papers 1101.3926, arXiv.org.
  12. Damiano Brigo & Massimo Morini, 2010. "Dangers of Bilateral Counterparty Risk: the fundamental impact of closeout conventions," Papers 1011.3355, arXiv.org.
  13. Damiano Brigo & Marco Tarenghi, 2009. "Credit Default Swap Calibration and Counterparty Risk Valuation with a Scenario based First Passage Model," Papers 0912.3031, arXiv.org.
  14. Adrian Blundell-Wignall & Paul Atkinson, 2010. "Thinking beyond Basel III: Necessary Solutions for Capital and Liquidity," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2010(1), pages 9-33.
  15. Damiano Brigo & Naoufel El-Bachir, 2007. "An exact formula for default swaptions’ pricing in the SSRJD stochastic intensity model," ICMA Centre Discussion Papers in Finance icma-dp2007-14, Henley Business School, Reading University.
  16. Damiano Brigo & Agostino Capponi, 2008. "Bilateral counterparty risk valuation with stochastic dynamical models and application to Credit Default Swaps," Papers 0812.3705, arXiv.org, revised Nov 2009.
  17. Crouhy, Michel & Galai, Dan & Mark, Robert, 2000. "A comparative analysis of current credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 59-117, January.
  18. Fries, Christian P., 2010. "Discounting Revisited. Valuations under Funding Costs, Counterparty Risk and Collateralization," MPRA Paper 23082, University Library of Munich, Germany, revised 30 May 2010.
  19. Michael Pykhtin & Dan Rosen, 2010. "Pricing counterparty risk at the trade level and CVA allocations," Finance and Economics Discussion Series 2010-10, Board of Governors of the Federal Reserve System (U.S.).
  20. Duffie, Darrell & Huang, Ming, 1996. " Swap Rates and Credit Quality," Journal of Finance, American Finance Association, vol. 51(3), pages 921-49, July.
  21. C. F. Lo & H. C. Lee & C. H. Hui, 2003. "A simple approach for pricing barrier options with time-dependent parameters," Quantitative Finance, Taylor & Francis Journals, vol. 3(2), pages 98-107.
  22. Chris Kenyon, 2010. "Completing CVA and Liquidity: Firm-Level Positions and Collateralized Trades," Papers 1009.3361, arXiv.org.
  23. Claudio Albanese & Toufik Bellaj & Guillaume Gimonet & Giacomo Pietronero, 2011. "Coherent global market simulations and securitization measures for counterparty credit risk," Quantitative Finance, Taylor & Francis Journals, vol. 11(1), pages 1-20.
  24. Damiano Brigo & Cristin Buescu & Massimo Morini, 2011. "Impact of the first to default time on Bilateral CVA," Papers 1106.3496, arXiv.org.
  25. Andrea Pallavicini & Daniele Perini & Damiano Brigo, 2011. "Funding Valuation Adjustment: a consistent framework including CVA, DVA, collateral,netting rules and re-hypothecation," Papers 1112.1521, arXiv.org, revised Dec 2011.
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Citations

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Cited by:
  1. Damiano Brigo & Cristin Buescu & Andrea Pallavicini & Qing Liu, 2012. "Illustrating a problem in the self-financing condition in two 2010-2011 papers on funding, collateral and discounting," Papers 1207.2316, arXiv.org, revised Jul 2012.
  2. Andrea Pallavicini & Daniele Perini & Damiano Brigo, 2012. "Funding, Collateral and Hedging: uncovering the mechanics and the subtleties of funding valuation adjustments," Papers 1210.3811, arXiv.org, revised Dec 2012.
  3. Andrea Pallavicini & Daniele Perini & Damiano Brigo, 2011. "Funding Valuation Adjustment: a consistent framework including CVA, DVA, collateral,netting rules and re-hypothecation," Papers 1112.1521, arXiv.org, revised Dec 2011.
  4. Chris Kenyon & Richard David Kenyon, 2013. "DVA for Assets," Papers 1301.5425, arXiv.org.

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