Lecture_7_CVA_201820180402201111

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CVAGeneral Framework2002 ISDA Master Agreement: Events of DefaultEvents of DefaultFailure to pay or deliverBreach of agreement; repudiation of agreementDefault under specified transactionBankruptcy ...Termination EventsIllegalityForce majeure eventDeferral of payments and deliveries during waiting periodTax events ...Events which cause Early Termination of the Master Agreement are alwaysbilateral.Paola Mosconi 20541 – Lecture 10-11 24 / 86
CVAGeneral FrameworkClose-out Amount and Netting SetClose-out AmountWhen one of the two counterparties incurs in one of the events that causesthe Early Termination of the contract, the non-defaulting party determinesthe amount of the losses or the costs of closing the position and replacing itwith a new one with another counterparty (substitution cost).Netting SetThe ISDA Master Agreement determines the possibility to net out all thepositions with the defaulted counterparty.The netting set P is formed by p contracts p i , whose individual value is V i (t).Each deal has weight w i = ±1 if the investor is respectively receiver/payer:V(t) =p∑w i V i (t)i=1Paola Mosconi 20541 – Lecture 10-11 25 / 86
Page 1 and 2: Introduction to Counterparty RiskPa
Page 3 and 4: Outline1 IntroductionCounterparty R
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Page 9 and 10: IntroductionCounterparty RiskBIS 20
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Page 17 and 18: IntroductionExposuresExposures IIPo
Page 19 and 20: CVAGeneral FrameworkCredit Value Ad
Page 21 and 22: CVAGeneral FrameworkCVA Definition
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Page 37 and 38: CVA CalculationWrong Way RiskWWR Ex
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Page 41 and 42: CVA CalculationWrong Way RiskOther
Page 43 and 44: CVA CalculationMonte Carlo Valuatio
Page 53 and 54: Case StudiesCase Study 1: Single In
Page 55 and 56: Case StudiesCase Study 1: Single In
Page 57 and 58: Case StudiesCase Study 2: Portfolio
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Mitigating Counterparty ExposureCol
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Selected ReferencesOutline1 Introdu
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