Lecture_7_CVA_201820180402201111

CVA Calculation
Monte Carlo Valuation
Approximation 1: Credit Model
We consider an intensity model 3 for the credit spread
If default of the counterparty were independent of the other sources of risk
X, a deterministic model would be enough to bootstrap the probabilities of
default of the counterparty
When λ and X are dependent, a common choice is the CIR model:
dλ(t) = κ(µ−λ(t))dt +ν √ λ(t)dW λ (t) (9)
The model is exactly calibrated to CDS quotes, assuming deterministic interest
rates
3 For exposures to equity products, structural models are more appropriate.
Paola Mosconi 20541 – Lecture 10-11 48 / 86