Post date: 17-Oct-2014 13:20:26
13 NOVEMBRE 2014, ore 15.00, Sala Riunioni Primo Piano
Relatore: Prof. Gianluca Fusai, UPO, DiSEI
Titolo: A Structural model for CVA computation with wrong way risk
Abstract:
The financial crisis that began in 2007 has highlighted the importance of assessing counterparty credit risk.
Accounting standard such as IAS39 now require that valuation of OTC derivatives take credit risk into account, for all entities.
For banks, the December 2010 publication of the BASEL III regulatory frameworks for capital and liquidity, includes an extra capital charge to cover the risk of mark-to-market losses on the Credit Value Adjustment (CVA). This charge in on the top of the Basel II capital requirements for counterparty credit risk. Furthermore, CVA is being used by financial institutions increasingly as a tool to actively manage counterparty credit risk. For example, it is possible to allocate the total CVA with a counterparty to the various desks that trade with that counterparty.
CVA is only significant for OTC transactions. According to the ISDA margin survey 2011, 70% of those transactions are subject to collateral agreements. But, for 30% of all OTC CVA is still a significant issue. In addition, even for collateralized OTC transactions the mitigating clauses never achieve a fully effective protection, due to the presence of various triggers. Therefore, the relevance of CVA measurement for accounting, regulatory and risk management issues.
In the present talk, after a description of the hidden problems in CVA computation, we put forward a structural model that is able to capture the so called wrong way risk, i.e. the joint dependency between default events and the expected exposure on default. Details on calibration and implementation will also be discussed.
The paper is joint with Laura Ballotta, Cass Business School, London.