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Toward active management of counterparty credit risk with CVA

Content provided by IBM


Emerging from the credit crisis that began in 2007, many financial institutions recognise the need to better manage counterparty credit risk (CCR) and have begun to centralise its quantification, pricing and management.

This centralisation often takes the form of a ‘CVA trading desk’ that provides the internal service of quantifying CCR for individual business lines and using the price measure of credit valuation adjustment (CVA) to actively manage this risk for an entire institution. CVA is a measure that adjusts the risk-free value of an instrument to incorporate CCR, and it is a complex challenge for a trading desk to quantify and manage due to its cross-asset and credit contingent nature. Furthermore, the presence of subtleties such as debt value adjustment (DVA) and wrong-way risk together with the general lack of mature CVA hedging instruments in the market today make CVA a complex topic.

Firms that are interested in improving CCR management and are considering establishing their own CVA desks have several key points to take into account as they work to develop CCR/CVA best practices by realigning their organisational processes and building the necessary systems and tools to support the proper calculation of CVA.

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