COLLATERALIZED CVA VALUATION WITH RATING TRIGGERS AND CREDIT MIGRATIONS

DOI10.1142/S021902491350009XMaRDI QIDQ5299995zbMATH OpenFDO

Authors Tomasz R. Bielecki, Igor Cialenco, Ismail Iyigunler

Publication date 24 June 2013

Published in International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1205.6542

zbMATH Keywords

additional termination eventsbreak clausescounterparty riskcredit valuation adjustmentCVAdynamic collateralizationOTC contractsrating triggers

Mathematics Subject Classification ID

Applications of statistics to actuarial sciences and financial mathematics (62P05) Derivative securities (option pricing, hedging, etc.) (91G20) Credit risk (91G40)

Abstract: In this paper we discuss the issue of computation of the bilateral credit valuation adjustment (CVA) under rating triggers, and in presence of ratings-linked margin agreements. Specifically, we consider collateralized OTC contracts, that are subject to rating triggers, between two parties -- an investor and a counterparty. Moreover, we model the margin process as a functional of the credit ratings of the counterparty and the investor. We employ a Markovian approach for modeling of the rating transitions of the two parties to the contract. In this framework, we derive the representation for bilateral CVA. We also introduce a new component in the decomposition of the counterparty risky price: namely the rating valuation adjustment (RVA) that accounts for the rating triggers. We give two examples of dynamic collateralization schemes where the margin thresholds are linked to the credit ratings of the parties. We account for the rehypothecation risk in the presence of independent amounts. Our results are illustrated via computation of various counterparty risk adjustments for a CDS contract and for an IRS contract.

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Cites work

• Dangerous knowledge: credit value adjustment with credit triggers
• Study of Dependence for Some Stochastic Processes

Cited in

(4)

• Funding, repo and credit inclusive valuation as modified option pricing
• Dangerous knowledge: credit value adjustment with credit triggers
• Conditional Markov chains: properties, construction and structured dependence
• Mild to classical solutions for XVA equations under stochastic volatility

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