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counterparty defaults first, CVA will be reduced. There are positive and negative aspects in each form of calibration. AIMs: Describe and calculate the following metrics for credit exposure: ... expected positive exposure and negative exposure, effective exposure, and maximum exposure. The KRM Analytical Engine also calculates the exposure amounts at default of a collateralized derivative instrument credit exposure covered by a collateral agreement on each expanded exposure risk factor vector sample path . KRM provides capabilities to generate the empirical probability distribution of future financial instrument values that is required to estimate the aforementioned PFE measures. More generally CVA can refer to a few different concepts: Assuming independence between exposure and counterparty’s credit quality greatly simplifies the analysis. For example, if the counterparty credit exposure is a defaultable OTC European-style call option on an equity security, its credit-adjusted economic value depends upon the price of the underlying equity security on the valuation date. The PFE simulation performed by the KRM Analytical Engine produces a sample distribution of potential exposure amounts for the derivative instrument D across the sample paths of the exposure risk factor vector at each future tenor point . Negative Expected Exposure (NEE): This is a mirror image of how EE is calculated. The KRM Analytical Engine can calculate the adjusted economic value of the collateral pool associated with a collateral agreement covering a counterparty risk exposure on each sample path of the exposure risk factor vector at each future tenor point . The PFE ‘add-on’ amount AOA(D,t) at time t is calculated as the product of the notional amount of the exposure NA(D,t) at time t and an add-on factor AOF(D,t) at time t, i.e. The values of these risk factors on the valuation date for the counterparty risk exposure provide the initial default intensity risk factor values for the default intensity models of the counterparties and the initial value recovery risk factor values for the value recovery process models for the exposure for each counterparty. 2 0 obj ���M�b"���o�Ӄ��X���]��Y]�����۳z~�?���Ckv���t��A?�������>hm(��s0`^!�B��4$M�'�d��9 0000001515 00000 n The KRM Analytical Engine can calculate the current economic value of the collateral pool associated with a collateral agreement covering a counterparty risk exposure, and the adjusted exposure amount at default AEAD(D,t) of the exposure D at time t is calculated as the difference between the unadjusted exposure amount at default EAD(D,t) of the instrument and the current economic value of the collateral pool V(C,t), if positive, and zero otherwise, i.e. Under this assumption this simplifies to, Where is the risk-neutral discounted expected exposure (EE). Valuing the financial instruments using the evolved yield curves and risk drivers on the future date for PFE calculations (future mark-to-model), which is provided by a combination of the KRM-mv and KRM-var functionality. When the collateral asset is denominated in the same currency as the collateral agreement the foreign currency collateral asset adjustment amount is equal to zero, i.e. stream The mathematical concept as defined above; A part of the regulatory Capital and RWA (Risk weighted asset) calculation introduced under Basel 3; The CVA desk of an investment bank, whose purpose is to: hedge for possible losses due to counterparty default; hedge to reduce the amount of capital required under the CVA calculation of Basel 3; The "CVA charge". 3 0 obj <>

Additionally, each positive replacement value must be associated with the counterparty to the financial instrument, so that the PFE measures can be calculated for a specific counterparty. Credit valuation adjustment (CVA) is the difference between the risk-free portfolio value and the true portfolio value that takes into account the possibility of a counterparty’s default. The KRM Analytical Engine can calculate the adjusted value of the collateral pool for each of the tenor points , when performing the counterparty credit exposure simulations discussed earlier in this section.

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