CVA and Wrong-Way Risk
Posted: 25 Sep 2012
Date Written: September 24, 2012
The authors propose a simple model for incorporating wrong-way and right-way risk into the Monte Carlo simulation that is used to calculate credit value adjustment (CVA). The model assumes a relationship between the hazard rate of a counterparty and variables whose values are generated, or can be generated, as part of the Monte Carlo simulation. The authors present numerical results for portfolios of 25 instruments dependent on five underlying market variables.
Keywords: Derivatives, Credit Derivatives Markets and Instruments, Modeling and Pricing Credit Derivatives, Portfolio Management, Risk Management, Risk Management, Portfolio Risk Management, Fixed Income
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