Integrated Structural Approach to Credit Value Adjustment

36 Pages Posted: 21 Dec 2015 Last revised: 5 May 2018

See all articles by Laura Ballotta

Laura Ballotta

Sir John Cass Business School - City, University of London

Gianluca Fusai

Università del Piemonte Orientale Dipartimento di Studi per l'Economia e l'Impresa; Sir John Cass Business School - City, University of London

Daniele Marazzina

Polytechnic University of Milan - Department of Mathematics

Date Written: April 27, 2018

Abstract

This paper proposes an integrated pricing framework for CVA of equity and commoditiy portfolios. The given framework, in fact, generates dependence endogenously, allows for calibration and pricing to be based on the same numerical schemes (up to Monte Carlo simulation), and also naturally allows the inclusion of risk mitigation clauses such as netting, collateral and initial margin provisions. The model is based on a structural approach which uses correlated Lévy processes with idiosyncratic and systematic components; the pricing numerical scheme, instead, efficiently combines Monte Carlo simulation and Fourier transform based methods. We illustrate the tractability and the performance of the proposed numerical scheme, and analyse the effects originated by right-way and wrong-way risk under different assumptions related to the parameters controlling collateral and netting agreements. A case study on a portfolio of commodity swaps using real market data is considered.

Keywords: Counterparty Credit Risk, Collateral, Dependence, Gap Risk, Initial Margin, Lévy Processes, Netting

JEL Classification: G10, G12, G13, G19

Suggested Citation

Ballotta, Laura and Fusai, Gianluca and Marazzina, Daniele, Integrated Structural Approach to Credit Value Adjustment (April 27, 2018). Available at SSRN: https://ssrn.com/abstract=2706416 or http://dx.doi.org/10.2139/ssrn.2706416

Laura Ballotta (Contact Author)

Sir John Cass Business School - City, University of London ( email )

Faculty of Finance
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

HOME PAGE: http://www.city.ac.uk/people/academics/laura-ballotta

Gianluca Fusai

Università del Piemonte Orientale Dipartimento di Studi per l'Economia e l'Impresa ( email )

Via Perrone, 18
Novara, 28100
Italy

HOME PAGE: http://https://upobook.uniupo.it/gianluca.fusai

Sir John Cass Business School - City, University of London ( email )

106 Bunhill Row
London, EC2Y 8HB
Great Britain

HOME PAGE: http:// www.cass.city.ac.uk/experts/G.Fusai

Daniele Marazzina

Polytechnic University of Milan - Department of Mathematics ( email )

Via Bonardi, 9
Milano, MI 20133
Italy

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