XVA of a Derivative on an Underlying Modelled by a Default Jump Process with an Analysis of CVA Wrong Way Risk for Bond Forwards

37 Pages Posted: 22 Apr 2015

See all articles by Mark Lichtner

Mark Lichtner

Independent

Christian P. Fries

Ludwig Maximilian University of Munich (LMU) - Faculty of Mathematics; DZ Bank AG

Date Written: April 19, 2015

Abstract

We consider the valuation and risk management of derivatives on defaultable assets such as bonds taking into account funding (FVA), cash collateral, underlying default, counterparty default (CVA) and default correlation using joint default poisson process. The framework can be considered as an extension of the Black Scholes FVA/CVA framework of Bugard and Kjaer. The results are applied to bond forward contracts and total return swaps with early termination at underlying default.

Keywords: Black Scholes, defaultable underlying, bond derivatives, funding costs (FVA), counterparty credit value adjustment (CVA), underlying credit value adjustment, XVA, cash collateralization, bond forwards, total return swaps, wrong way Risk, default correlation

JEL Classification: G13

Suggested Citation

Lichtner, Mark and Fries, Christian P., XVA of a Derivative on an Underlying Modelled by a Default Jump Process with an Analysis of CVA Wrong Way Risk for Bond Forwards (April 19, 2015). Available at SSRN: https://ssrn.com/abstract=2596884 or http://dx.doi.org/10.2139/ssrn.2596884

Christian P. Fries

Ludwig Maximilian University of Munich (LMU) - Faculty of Mathematics ( email )

Theresienstrasse 39
Munich
Germany

DZ Bank AG ( email )

60265 Frankfurt am Main
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
211
Abstract Views
1,949
rank
179,761
PlumX Metrics