The Credit Valuation Adjustment of an Interest Rate Swap Step-by-Step (Static Formulation)

11 Pages Posted: 27 Nov 2017

See all articles by Alonso Pena

Alonso Pena

University of Cambridge; Fitch Group

Date Written: September 22, 2016

Abstract

Counterparty credit risk (CCR) is a fundamental issue in the modern financial markets. CCR attempts to capture the impact of the potential losses due to the default (e.g. bankruptcy) of the counterparty in a financial operation. The most used quantitative measure of CCR is the Credit Valuation Adjustment (CVA ). In this laboratory, we show how to calculate the CVA of an interest rate swap in a simplified way. The approach we follow (Static Formulation) is to consider the interest rate yield curve to be static during the duration of the contract. In the next article, we will show how to extend this into a dynamic yield curve (Dynamic Formulation) using Monte Carlo simulation. We demonstrate our solution in Excel.

Keywords: counterparty credit risk, credit valuation adjustment, derivatives

JEL Classification: C60

Suggested Citation

Pena, Alonso, The Credit Valuation Adjustment of an Interest Rate Swap Step-by-Step (Static Formulation) (September 22, 2016). Available at SSRN: https://ssrn.com/abstract=3075780 or http://dx.doi.org/10.2139/ssrn.3075780

Alonso Pena (Contact Author)

University of Cambridge ( email )

Trinity Ln
Cambridge, CB2 1TN
United Kingdom

Fitch Group ( email )

30 North Colonnade
Canary Wharf
London, E14 5GN
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
339
Abstract Views
1,057
rank
90,469
PlumX Metrics