Computing valuation adjustments for counterparty credit risk using a modified supervisory approach
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Computing valuation adjustments for counterparty credit risk using a modified supervisory approach Patrick Büchel1 · Michael Kratochwil2,3
· Daniel Rösch2
© The Author(s) 2020
Abstract Considering counterparty credit risk (CCR) for derivatives using valuation adjustments (CVA) is a fundamental and challenging task for entities involved in derivative trading activities. Particularly calculating the expected exposure is time consuming and complex. This paper suggests a fast and simple semi-analytical approach for exposure calculation, which is a modified version of the new regulatory standardized approach (SA-CCR). Hence, it conforms with supervisory rules and IFRS 13. We show that our approach is applicable to multiple asset classes and derivative products, and to single transactions as well as netting sets. Keywords Counterparty credit risk · Credit valuation adjustments (CVA) · Credit exposure · Standardized approach for measuring counterparty credit risk exposures (SA-CCR) JEL Classification G21 · G32
The authors would like to thank the participants of the Quantitative Methods in Finance (QMF) Conference 2018 in Sydney for helpful comments. We would also like to thank two anonymous referees for comments which greatly helped us improving the paper.
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Michael Kratochwil [email protected] Patrick Büchel [email protected] Daniel Rösch [email protected]
1
Commerzbank AG, Mainzer Landstraße 157, 60327 Frankfurt am Main, Germany
2
Chair of Statistics and Risk Management, Universität Regensburg, Universitätsstraße 31, 93040 Regensburg, Germany
3
Dr. Nagler & Company GmbH, Maximilianstraße 47, 80538 Munich, Germany
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P. Büchel et al.
1 Introduction The financial crisis and its aftermath have revealed the importance of counterparty credit risk (CCR) in over-the-counter (OTC) derivative transactions. Today, the consideration of CCR is market standard and the calculation of credit valuation adjustments (CVA) has evolved to be a fundamental task for entities involved in derivatives trading due to several reasons. Firstly, market participants need to consider CCR when pricing derivatives. Secondly, international financial reporting standards (IFRS 13) require all entities involved in derivative transactions to consider CCR in the accounting fair value.1 Thirdly, financial institutions are expected to calculate minimum capital requirements for CVA risk under Basel III, which implies the calculation of CVA as well as CVA sensitivities. The most time-consuming and complex part of xVA calculation is the determination of the expected exposure. Given the lack of clear methodological guidance in IFRS 13, a wide range of methods has been developed by regulators, financial institutions and scientists alike. As many market participants may not be able to apply highly complex and sophisticated methods, there is a need for simpler semi-analytical and parametric approaches. Most existing approaches are either too simplistic to be robust, only applicable on transaction level or suitable for a small r
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