Climate Change Valuation Adjustment (CCVA) Using Parameterized Climate Change Impacts

22 Pages Posted: 23 Feb 2021 Last revised: 10 May 2021

See all articles by Chris Kenyon

Chris Kenyon

MUFG Securities EMEA plc

Mourad Berrahoui

Lloyds Banking Group

Date Written: May 9, 2021

Abstract

We introduce Climate Change Valuation Adjustment (CCVA) to capture climate change impacts on CVA+FVA that are currently invisible assuming typical market practice. To discuss such impacts on CVA+FVA from changes to instantaneous hazard rates we introduce a flexible and expressive parameterization to capture the path of this impact to climate change endpoints, and transition effects. Finally we provide quantification of examples of typical interest where there is risk of economic stress from sea level change up to 2101, and from transient transformations of business models. We find that even with the slowest possible uniform approach to a climate change impact in 2101 there can still be significant CVA+FVA impacts on interest rate swaps of 20 years or more maturity. Transformation effects on CVA+FVA are strongly dependent on timing and duration of business model transformation. Using a parameterized approach enables discussion with stakeholders of economic impacts on CVA+FVA, whatever the details behind the climate impact.

Keywords: XVA, credit, funding, CVA, FVA, climate change, CDS, extrapolation, hazard rate

JEL Classification: Q54, Q59, Q55, Q58, G13, G11, G17, G21, G24, G33

Suggested Citation

Kenyon, Chris and Berrahoui, Mourad, Climate Change Valuation Adjustment (CCVA) Using Parameterized Climate Change Impacts (May 9, 2021). Available at SSRN: https://ssrn.com/abstract=3790098 or http://dx.doi.org/10.2139/ssrn.3790098

Chris Kenyon (Contact Author)

MUFG Securities EMEA plc ( email )

25 Ropemaker St
London, EC2Y 9AJ
United Kingdom

Mourad Berrahoui

Lloyds Banking Group ( email )

10 Gresham Street
London, EC2V 7AE
United Kingdom

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