'Risk neutral simulation volatility' presentation slideshows

CVA and FVA Overview

Credit value adjustment (CVA) is the market price of counterparty credit risk that has become a central part of counterparty credit risk management. By definition, CVA is the difference between the risk-free portfolio value and the true/risky portfolio value. In practice, CVA should be computed at portfolio level. That means calculation should take Master agreement and CSA agreement into account. Funding Valuation Adjustment (FVA) is introduced to capture the incremental costs of funding uncollateralized derivatives. It can be referred to as the difference between the rate paid for the collateral to the bank’s treasury and rate paid by the clearinghouse. Also FVA can be thought of as a hedging cost or benefit arising from the mismatch between an uncollateralized client trade and a collateralized hedge in the interdealer market. FVA should be also calculated at portfolio level. This presentation elaborates an integrated framework for calculating both CVA and FVA. We also discuss the pros and cons of comparing the popular credit exposure approach and the more accurate least square Monte Carlo approach. You can find more details at http://www.finpricing.com/lib/cvaFva.html

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