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CVA calculation example
Let’s calculate CVA (credit value adjustment) analytically. We will see that analytical CVA calculation is quite complex even for a fairly simple transaction (a vanilla swap). A few shortcuts will help us simplify the calculation.
Historical or implied?
To calculate counterparty exposure, we need to calibrate our scenario generator to historical data. However, for CVA calculations, we need scenarios based on implied volatilities of the underlying risk factors. Continue reading
Posted in Finance
Tagged counterparty exposure, credit value adjustment, CVA, EAD, historical volatility, implied volatility
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