Work detail

Counterparty credit risk modelling

Author: Mgr. Mikoláš Volek
Year: 2016 - summer
Leaders: prof. PhDr. Petr Teplý Ph.D.
Work type: Finance, Financial Markets and Banking
Language: English
Pages: 89
Awards and prizes:
Abstract: Counterparty credit risk is an important type of financial risk. The importance of
proper counterparty risk management became most apparent in the wake of the 2008
series of failures of several large banks. Correlation of market factors is an important
issue in the calculation of CVA. A notable case of correlation is wrong-way risk which
occurs whenever the probability of default of the counterparty is positively correlated
with exposure. The basic formulas for CVA and basic counterparty credit risk models
do not account for wrong-way risk because its modeling is nontrivial. This thesis
aims to answer how well can the impact of wrong-way risk on CVA be approximated
with an add-on which only depends on correlation between the price of the underlying
asset and the credit spread of the counterparty. The thesis is supplemented by a
fully documented implementation of the model in the Mathematica software.




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