CVA and Wrong-Way Risk

Posted: 25 Sep 2012

See all articles by John C. Hull

John C. Hull

University of Toronto - Rotman School of Management

Alan White

University of Toronto - Rotman School of Management

Date Written: September 24, 2012

Abstract

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

Suggested Citation

Hull, John C. and White, Alan, CVA and Wrong-Way Risk (September 24, 2012). Financial Analysts Journal, Vol. 68, No. 5, 2012, Rotman School of Management Working Paper No. 2151507, Available at SSRN: https://ssrn.com/abstract=2151507

John C. Hull (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
(416) 978-8615 (Phone)
416-971-3048 (Fax)

Alan White

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-978-3689 (Phone)
416-971-3048 (Fax)

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