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Credit Valuation Adjustment: In theory and practice
KTH, School of Engineering Sciences (SCI), Mathematics (Dept.), Mathematical Statistics.
KTH, School of Engineering Sciences (SCI), Mathematics (Dept.), Mathematical Statistics.
2014 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

This thesis is intended to give an overview of creditvaluation adjustment (CVA) and adjacent concepts. Firstly, the historicalevents that preceded the initiative to reform the Basel regulations and tointroduce CVA as a core component of counterparty credit risk are illustrated.After some conceptual background material, a journey is taken through theregulatory aspects of CVA. The three most commonly used methods for calculatingthe regulatory CVA capital charge are explained in detail and potentialchallenges with the methods are addressed. Further, the document analyses ingreater depth two of the methods; the internal model method (IMM) and thecurrent exposure method (CEM). The differences between these two methods areexplained mathematically and analysed. This comparison is supported bysimulations of portfolios containing interest rate swap contracts with differenttime to maturity and of counterparties with varying credit ratings. Oneconcluding observations is that credit valuation adjustment is a measure of centralimportance within counterparty credit risk. Further, it is shown that IMM has someimportant advantages over CEM, especially when it comes to model connection withreality. Finally, some possible future work to be done within the topic area is suggested.

Place, publisher, year, edition, pages
TRITA-MAT-E, 2014:08
Keyword [en]
Basel II, Basel III, OTC Derivatives, Credit Valuation Adjustment, CVA
National Category
Mathematical Analysis
URN: urn:nbn:se:kth:diva-140841OAI: diva2:692743
Subject / course
Mathematical Statistics
Educational program
Master of Science in Engineering -Engineering Physics
Available from: 2014-01-31 Created: 2014-01-31 Last updated: 2014-01-31Bibliographically approved

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