Jumping with Default: Wrong-Way-Risk Modeling for Credit Valuation Adjustment
33 Pages Posted: 14 May 2015 Last revised: 23 Aug 2016
Date Written: August 22, 2016
We investigate credit value adjustments (CVAs) in the presence of wrong-way risk (WWR) by introducing jumps at default to model correlation between counterparty's default and relevant risk factors. We focus on the foreign-exchange and interest-rate cases, presenting efficient CVA approximations based on CVA computation under independence assumption. Numerical examples of the CVAs of a cross-currency swap and a vanilla interest-rate swap are showcased.
Keywords: Wrong-way risk; Credit value adjustment; jump diffusion model; default
JEL Classification: G10; G12; G18; C60
Suggested Citation: Suggested Citation