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Counterparty Credit Risk: CVA, Collateral, Basel 3 and Funding

Day One

Introduction to CVA

  • History and definitions
  • Accounting and regulatory capital rules
  • Quantifying CVA
  • CVA and valuation

Credit exposure

  • Credit limits
  • Defining credit exposure
  • Expected exposure (EE), potential future exposure (PFE) and expected positive exposure (EPE)
  • Typical exposure profiles
  • Mitigating credit exposure

Example: examples of EE, PFE, EPE and the impact of netting and collateral

Methodology for simulating exposure

  • Simple approaches
  • Overview of simulation methodology
  • Example
  • Aggregation and the impact of netting
  • Incremental exposure
  • Marginal exposure

Example: quantifying the impact of netting on credit exposure

Quantifying credit exposure in the presence of risk mitigants

  • Impact of terminations / resets
  • Call and return calculations
  • The margin period of risk
  • Post processing
  • Impact of collateral on exposure - examples

Example: implementing collateral calculation to calculate call and return amounts and simulating the impact of collateral on exposure

Day Two

Default and credit spreads

  • Defining default probability
  • Historical data
  • Market-implied default probabilities
  • Recovery rates
  • Mapping methods

Example: calculating default probability from CDS quotes

Credit value adjustment (CVA)

  • Example - the CVA of a swap
  • CVA formulas
  • CVA and risk neutrality
  • Examples
  • Incremental and marginal CVA

Example: computing CVA using approximate and more accurate methods. Computing incremental CVA

Debt Value Adjustment (DVA)

  • CVA for collateralised positions
  • Bilateral CVA and DVA
  • Correlation and closeout assumptions
  • Monetising DVA

Example: computing CVA in the presence of netting and collateral and computing DVA

Counterparty risk capital requirements

  • Default risk capital charge
  • PFE at the portfolio level
  • Basel III modifications (IMM)
  • Basel III and CVA VAR
  • CVA VAR example

Workshop: computing the alpha factor for various difference credit portfolios

Day Three

Funding and valuation

  • Rationale
  • OIS discounting
  • Funding value adjustment (FVA)
  • Optimisation of CVA, DVA, funding and regulatory capital

Example: example calculation of FVA (LVA)

Wrong-way risk

  • Examples and empirical evidence
  • Portfolio wrong-way risk
  • Trade-level wrong-way risk
  • The impact of collateral and DVA

Example: simple wrong-way risk model and simple CDS counterparty risk calculation

Central Counterparties

  • Multilateral netting
  • The mechanics of trading through a CCP
  • Margining and the loss waterfall
  • Important CCP questions
  • CCP capital charges

Managing CVA volatility

  • How to manage CVA
  • Dynamic hedging and CVA Greeks
  • Correlation and cross gamma
  • DVA and the “basis book” approach

Final review and additional questions