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Credit Value Adjustment with Wrong-Way Risk
Dec 11, 2014
This Technical Note presents a case study for calculating Credit and Debit Valuation Adjustment (CVA and DVA) on a Credit Default Swap (CDS) written on a major investment bank in 2007, just before the financial crisis. We compare results with and without considering the effect of wrong-way risk (WWR), the adverse correlation between the value of the transaction and the default risk of the counterparty. By using the newly released WWR-CVA model of RiskManager, we show that wrong-way risk has a material impact on both CVA and DVA.
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