Climate Change Valuation Adjustment (CCVA) Using Parameterized Climate Change Impacts
22 Pages Posted: 23 Feb 2021 Last revised: 10 May 2021
Date Written: May 9, 2021
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: Suggested Citation