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A note on CVA and wrong way risk

Author

Listed:
  • Roberto Baviera

    (Department of Mathematics, Politecnico di Milano, 32 p.zza Leonardo da Vinci, I-20133 Milano, Italy)

  • Gaetano La Bua

    (Department of Mathematics, Politecnico di Milano, 32 p.zza Leonardo da Vinci, I-20133 Milano, Italy)

  • Paolo Pellicioli

    (#x2020;Intesa Sanpaolo Vita S.p.A., 55/57 Viale Stelvio, I-20159 Milano, Italy)

Abstract

Hull and White approach to Wrong Way Risk in the computation of Credit Value Adjustment (CVA) is considered the most straightforward generalization of the standard Basel approach. The model is financially intuitive and it can be implemented by a slight modification of existing algorithms for CVA calculation. However, path dependency in the key quantities has non-elementary consequences in the calibration of model parameters. We propose a simple and fast approach for computing these quantities via a recursion formula. We show in detail the calibration methodology on market data and CVA computations in two relevant cases: a FX forward and an interest rate swap.

Suggested Citation

  • Roberto Baviera & Gaetano La Bua & Paolo Pellicioli, 2016. "A note on CVA and wrong way risk," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 1-14, June.
    • Handle: RePEc:wsi:ijfexx:v:03:y:2016:i:02:n:s2424786316500122
    DOI: 10.1142/S2424786316500122
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    References listed on IDEAS

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    1. Roberto Baviera & Alessandro Cassaro, 2015. "A Note on Dual-Curve Construction: Mr. Crab's Bootstrap," Applied Mathematical Finance, Taylor & Francis Journals, vol. 22(2), pages 105-132, April.
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    Cited by:

    1. BRIGO, Damiano & VRINS, Frédéric, 2018. "Disentangling wrong-way risk: pricing credit valuation adjustment via change of measures," European Journal of Operational Research, Elsevier, vol. 269(3), pages 1154-1164.

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