Lecture_7_CVA_201820180402201111
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Introduction
Counterparty Risk
Counterparty Risk Management
Counterparty risk is the risk that one bank faces in order to be able to lend money
or invest towards a counterparty with relevant default risk.
The bank needs to measure that risk and cover for it by setting capital aside.
Credit VaR is calculated through the following steps:
1 the basic financial variables underlying the portfolio, including also defaults of
the counterparties, are simulated under the historical probability measure
P, up to the risk horizon
2 at the risk horizon, in every simulated scenario of the basic financial variables,
the portfolio is priced, eventually obtaining a number of scenarios for the
portfolio value at the risk horizon. “Priced”means that discounted future cash
flows of the portfolio after the risk horizon are averaged, conditional on each
scenario at the risk horizon but under the (pricing) risk neutral measure Q
Paola Mosconi 20541 – Lecture 10-11 14 / 86