Credit Valuation Adjustment (CVA)

22 Pages Posted: 2 Dec 2008 Last revised: 19 Oct 2010

Shahram Alavian

Royal Bank of Scotland (RBS); Barclays Capital; Lehman Brothers Europe; Toronto-Dominion (TD) Bank Financial Group - TD Securities

Jie Ding

Lehman Brothers

Peter Whitehead

Lehman Brothers

Leonardo Laudicina

Lehman Brothers

Date Written: August 28, 2008

Abstract

This paper provides an overview of counterparty default risk and counter-party valuation adjustments, within the context of collateralized and un-collateralized trading relationships. The counterparty valuation adjustment terms are derived by decomposing an un-defaultable portfolio into a set of binary states. These states are a set of market values (positive or negative), default states (default or no default) and recoveries (recover the the recovery amount or not). In particular, the asset charge is formulated for both un-collateralized and collateralized portfolios while different models are provided for the collateral transfer calculations of the collateralized trading accounts.

Suggested Citation

Alavian, Shahram and Ding, Jie and Whitehead, Peter and Laudicina, Leonardo, Credit Valuation Adjustment (CVA) (August 28, 2008). Available at SSRN: https://ssrn.com/abstract=1310226 or http://dx.doi.org/10.2139/ssrn.1310226

Shahram Alavian (Contact Author)

Royal Bank of Scotland (RBS) ( email )

135, Bishopsgate
EC2M 3UR London
United Kingdom

HOME PAGE: http://www.shahramalavian.net

Barclays Capital ( email )

5 Colonade
London E14 5LE
United Kingdom
022031346761 (Phone)

Lehman Brothers Europe ( email )

London
United Kingdom

Toronto-Dominion (TD) Bank Financial Group - TD Securities ( email )

6th Floor
TD Tower, 66 Willington Street West
Toronto, Ontario M5K 1A2
Canada

Jie Ding

Lehman Brothers ( email )

25 Bank Street
30th Floor
London E14 5LE
United Kingdom

Peter Whitehead

Lehman Brothers ( email )

25 Bank Street
30th Floor
London E14 5LE
United Kingdom

Leonardo Laudicina

Lehman Brothers ( email )

25 Bank Street
30th Floor
London E14 5LE
United Kingdom

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