FINCAD: Wrong Way Risk In CVA Calculations

The credit value adjustment (CVA) is an adjustment to the way a dealer values a portfolio of derivatives with a counterparty to allow for the possibility that the counterparty might default. The CVA reduces the value of the portfolio by the amount that is expected to be lost if the counterparty defaults. We described how it is calculated in an earlier blog: “Valuation Adjustments 1.”  The life of the outstanding derivatives is divided into a number of intervals and CVA is set equal to

     

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