Credit valuation adjustment

• Autor(a) principal: Sousa, Bruno Filipe Soares dos Santos
• Data de Publicação: 2016
• Tipo de documento: Dissertação
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10071/13443
• topic: Credit Valuation Adjustment; Swaption Approach; Counterparty Credit Risk; Interest Rate Swap Price; Finanças; Crédito; Risco de crédito; Taxa de juro; Avaliação

This thesis is intended to give an overview of Credit Valuation Adjustment (CVA) techniques and adjacent concepts. Firstly, the historical events that preceded the initiative to reform the Basel regulations and to introduce CVA are summarized. After some conceptual background material, a journey is taken through the pricing aspects of CVA. The unilateral CVA and Debt Valuation Adjustment (DVA) are derived in the case where one party engaging in a transaction is assumed to be defaultable, while bilateral CVA is derived in the case where both parties in a transaction are assumed to be defaultable. In this context, hedging aspects are also examined and risk-neutral pricing of CVA is discussed. There are several methods for pricing the CVA which will be explained in detail, and potential challenges with the methods will be also addressed. The document analyses in greater depth two of the methods: advanced and semi-analytical (swaption approach). The differences between these two methods are explained mathematically and analyzed. This comparison is supported by simulations of portfolios containing interest rate swaps contracts. In the second part the thesis, the relation between CVA from a regulatory perspective, i.e. driven by the CVA capital charge introduced in the third Basel accord, CVA from an accounting perspective, i.e. driven by IFRS, and CVA from a market perspective, i.e. as a potentially tradable asset, is discussed.