IDEAS home Printed from
   My bibliography  Save this paper

CVA, Wrong Way Risk, Hedging and Bermudan Swaption


  • Boukhobza, Ali
  • Maetz, Jerome


“Roughly two-thirds of credit counterparty losses were due to credit valuation adjustment losses and only one-third were due to actual defaults” according to the Basel Committee on Banking Supervision, highlighting the importance of counterparty credit risk management to the derivatives contracts. Today, managing counterparty credit risk has become an integrated part of many derivative trading desks’ day-to-day activities and the need of accurate pricing, efficient hedging strategies and practical proxies has become critical. As a result, banks have sharpened their CVA pricing and modeling infrastructure and most have a dedicated trading desk dynamically hedging their CVA. However, if pricing techniques have become standard over the past few years, the expected positive exposure (EPE) modeling is usually not taking into account the embedded correlation between the counterparty and underlying market movements. This correlation known as wrong way risk can substantially affect the price and the related hedging strategy and is the main focus of this article.

Suggested Citation

  • Boukhobza, Ali & Maetz, Jerome, 2012. "CVA, Wrong Way Risk, Hedging and Bermudan Swaption," MPRA Paper 42144, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:42144

    Download full text from publisher

    File URL:
    File Function: original version
    Download Restriction: no

    References listed on IDEAS

    1. Morini, Massimo & Prampolini, Andrea, 2010. "Risky funding: a unified framework for counterparty and liquidity risk," MPRA Paper 23555, University Library of Munich, Germany.
    Full references (including those not matched with items on IDEAS)

    More about this item


    CVA; Credit Valuation Adjustment; WWR; Wrong Way Risk; Hedging; Swap; Bermudan Swaption; EPE; Expected Positive Exposure;

    JEL classification:

    • A10 - General Economics and Teaching - - General Economics - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:42144. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter) or (Rebekah McClure). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.