Risk Taker

Dan Rosen
R2 Financial Technologies
RiskLab Madrid, May 2011
CVA, Basel III and

Wrong-Way Risk
Dan Rosen
dan.rosen@R2-financial.com
2006-2011 R2 Financial Technologies
Regulatory Capital and CVA
Mark-to-market losses due to credit valuation

adjustments (CVA) were not directly
capitalised. Roughly twothirds of CCR
losses were due to CVA losses and only onethird were due to actual defaults.
Basel Committee on Banking Supervision (2009)
Dan Rosen
Outline
Introduction
CCR, CVA, management of CVA
CCR capital and Basel III
Wrong-way risk (WWR)
Computing CVA and CVA VaR
Wrong-way risk methodology
Examples
Concluding remarks
Counterparty Credit Risk Evolution

Hedging CCR
JtD risk and
CVA
Economic capital
Default risk
Basel II (IRB)
EPE and alpha
Counterparty
exposures
and limits
CCR valuation: CVA

Fundamental vs.
Market values (CDS
spreads)
Unilateral bilateral
Economic capital
Credit + market
risk (CVA)
Basel III...
CVA is now an integral
part of current accounting
rules for P&L, and of the
new proposal for banking
regulation (Basel III
rules)
12
Dan Rosen
Pricing CCR: Credit Value Adjustment (CVA)

CVA is the market value of counterparty credit risk

CVA = Risk-free portfolio value true portfolio value accounting
for counterpartys default
CVA is an integral component of the value of derivatives

Now an integral part of accounting rules, and Basel III
Prior to mid-2007, CVA was either ignored by dealers, or too small to be noticed
by customers
CVA is measured at the counterparty level

Ideally, it should be part of the trade valuation but calculated separately because
of portfolio effects
In addition to credit spreads (and competition) the CVA charged on a particular

trade is affected by:
Banks existing portfolio of trades and the credit mitigation used in the deal
Methodology used to determine exposures
13
CVA and Risk Management

Some banks started to price and hedge CVA in the mid 1990s
More recently, more banks started to price and actively hedge CVA
Banks currently calculate and manage CVA according to different

business models and subject different accounting regimes
Various large banks already manage CVA risks as part of their Trading
Books: daily MtM, active hedging, enforced market risk limits and intent to
transfer out the CVA risks
Some banks have opted for central CVA desk
Others have opted for CVA desks deployed in their main business units
CVA desks sell full counterparty credit insurance to the derivatives

trading desks
Manage the risks of the CVA after inception of the trades
Subject to risk limits and usually do not have a revenue generation budget
14
2006-2011
2009
14IACPM
Dan Rosen
Some Definitions
Counterparty exposure: economic loss incurred on all outstanding

transactions if counterparty defaults
Cost of replacing or hedging the contracts at the time of default
Accounts for netting and collateral, but is generally not adjusted by possible
recoveries
More generally, exposures can also be defined as potential losses on credit

migration events such as downgrades (e.g. in CreditMetrics)
Potential future exposure (PFE): current exposure plus the potential future
changes in exposures during the contracts lives
Accounts for the aging of the portfolio and underlying market factor movements
which directly affect contract values at a future times
Example: a pay-fix IRS with negative MtM has current exposure = 0.

If future rates rise, the contract can have a positive value potential
exposure to holder
17
Computing CVA
N
V (t ) = Vi (t )
Value of the CP portfolio at t
i =1
E ( t ) = max {0,Vi (t )}
Gross CP-level exposure (netting not allowed)
i =1
Netted CP-level exposure (single agreement)
CP-level (margined) E (t ) = max {V (t ) C (t ), 0}
E (t ) = max {V (t ), 0}
Counterparty PFE
35
Mean Exposure
95 Percentile
30
Con d. EPE
25
Instantaneous collateral
Lagged collateral C (t ) = max V (t t ) H ,0

{
}
C (t ) = max {V (t ) H ,0}
Exposure ( Million)
20
15
10
5475
5110
4745
4380
4015
3650
3285
2920
2555
2190
1825
1460
1095
730
365
Time (days)
CP portfolios with multiple netting agreements and trades outside of the

agreement can be modeled by a combination of these equations
18
Dan Rosen
CCR Credit Risk Model Components
Exposures
Default
Migration
Recovery
19
CCR and Potential Future Exposures (PFEs)

1. Risk Factor
1.Risk
factors
Scenario
scenarios
Generation
generation
Simulation
(Valuation)
2.
Pricing
Counterparties
Scenarios
Instruments
Assets
V (p, S, t)
Mark-to-Future
Values
3. CP aggregation,
mitigationgeneration
3. Exposure
(netting,collateral...)
collateral)
(netting,
PFE (P, S, t)
Tim
e
4. PFE
4. Exposures
Statistics
statistics
Maximum Peak
Exposure (T)
Effective
EPE (T)
EPE
(T)
Effective
Expected
Exposure
Peak Exposure (95%)
Expected
Exposure
Source: de Prisco and Rosen (2005)

20
Dan Rosen
Credit Losses and CVA

Unilateral CP-level CVA the banks discounted loss due to the CP

default (recovers a fraction R of the exposure )
L = 1 T (1 R) E ( ) D( )
{ }
CVA obtained by discounting losses and applying the expectation

T
CVA = (1 R ) dP(t ) e(t )

0
where
e(t ) = E t [ D (t ) E (t ) ] E D (t ) E (t ) = t
is the risk-neutral discounted expected exposure (EE) at t,
conditional on the CPs default at t
(everything is under the risk-neutral measure)
21
Calculating Exposures and CVA by Simulation

Banks use Monte Carlo simulation in practice to obtain the distribution of

counterparty-level exposures
The calculation of CVA and CVA contributions can be easily incorporated to the
Monte Carlo simulation of the counterparty-level exposure
In general, exposures are simulated separately implicitly assume that they are
independent of counterparties credit quality
Dependence of exposure on the counterpartys credit quality can be

incorporated in the CVA calculation, if the trade values and credit quality of the
banks counterparties are simulated jointly (both right/wrong-way risk and
exposure-limiting agreements)
Conditional expectations in the CVA formulae can be replaced by the unconditional

ones
E.g. using a joint process with stochastic intensities, or a copula methodology as in

Garcia cespedes et al
Need to make model computationally efficientC
22
Dan Rosen
Calculating CVA Simulation

Unilateral CVA Independent market and credit risk
CVA = (1 R ) k e(t k )[ P (t k ) P (t k 1 )]
e(tk ) = M1
M
j =1
D ( j ) (t k ) E ( j ) (t k )
Counterparty PFE
35
Mean Exposure
95 Percentile
30
Co nd. EPE
25
Exposure ( Million)
20
15
10
5475
5110
4745
4380
4015
3650
3285
2920
2555
2190
1825
1460
1095
730
365
Time (days)
23
Analytical CVA (Normal Approx.)

It is useful in practice to estimate EE, CVA
Vi (t ) = i (t ) + i (t ) X i
an CVA contributions quickly outside of the simulation system

Analytical expression s can be derived for EE and CVA contributions,

for the case when trade values are normally distributes
Independent market and credit: contributions without collateral
e(t ) = E t [ D (t ) E (t ) ] E D (t ) E (t ) = t
(t )
(t )
e (t ) = ( t )
+ (t )
(
t
)
(t )
(t )
(t ) H
e(t ) = (t )

(
t
)
(t )

(t )
(t ) H
(t ) H
+ (t )

+ H
(
t
)
(
t
)
(t )

24
Dan Rosen
CCR and CVA Capital Charges in Basel III

Basel III introduces a new charge for MtM losses (CVA spread risk):
associated with a deterioration in the credit worthiness (greater source of
losses than outright defaults)
The total CCR charges aim to cover default, migration and spread risks
Total CCR capital = CCR (default) capital + CVA risk capital
Revision of Internal Model Method (IMM) for measuring exposures based

on Effective EPE with stressed parameters address wrong-way risk
Default risk capital charge: greater of

Portfolio capital charge based on Eff EPE using current market data
Portfolio capital charge based on Eff EPE using stressed calibration

28
CCR Capital Carge (Basel II)

N 1 (PD j ) j N 1 (0.001)
N
PD MF (M , PD )
Basel Capital = LGD j EAD j N
j
j
j
1 j

j =1
EAD j = Eff EPE j
( )
EC LT
=
EC LEPE
Credit losses random

exposures
Credit losses deterministic
exposures (EPE)
Eff EPE = effective EPE (expected positive exposure)
Alpha: measures the effect of using deterministic exposures (EPE) instead

of stochastic exposures ratio of
EC from a joint simulation of market and credit risk factors
EC when CP exposures are constant and equal to EPE
Eff EPE and M (maturity) based on banks internal model
Supervisory alpha = 1.4 allow for own estimate, subject to floor = 1.2
32
Dan Rosen
CVA Risk Capital Charge

CVA capital charge calculation depends on banks approved methods

for CCR and specific interest rate risk
Historical simulation, Monte Carlos simulation, etc.
Full repricing, sensitivities to specific tenors, sensitivities to parallel shifts

(CS01), second order sensitivities, etc.
Advanced CVA capital charge

Impact of changes in the counterparties credit spreads on the CVAs of all

OTC derivative counterparties, together with eligible CVA hedges
Using the banks VaR model for bonds restricted to changes in credit
spreads, and does not model the sensitivity of CVA to other factors
CVA capital charge includes general and specific credit spread risk
Includes stressed VaR but excludes IRC
VaR = non-stressed VaR + stressed VaR

33
CVA VaR: Market Risk Capital and VaR

From a market risk perspective, CVA is just essentially another price risk
Standard techniques to measure market VaR

Full simulation
Sensitivities
Portfolio loss distribution

10-day 99% VaR
0.12
Empirical
0.10
Very expensive re-pricing

Normal
0.08
Probability
Simple approximations sought
Regulatory Basel III focuses only

on spread risk
0.06
0.04
0.02
0.00
-140
Counterparty PFE
-100
-60
-20
21
61
101
141
Size of Loss (thousands USD)
35
Mean Exp osure
95 Percen tile
30
Co nd . EPE
CVA = (1 R ) dP(t ) e(t )
25
Exposure ( Million)
20
15
10
e (t ) = E t [ D (t ) E (t ) ] E D (t ) E (t ) = t
5475
5110
4745
4380
4015
3650
3285
2920
2555
2190
1825
1460
1095
730
365
Time (days)
34
Dan Rosen
CVA Calculation and Basel III Formula

CVAWWR = (1 R ) k e (tk ) [P(t k ) P(t k 1 )]
Regulatory CVA formula
Calibration
Spreads
For individual CPs where available, otherwise proxy by rating, industry,
region
For stressed VaR using the most severe one-year period in the
exposure stressed calibration
EE
Non-stressed VaR EE with current parameter calibration of exposures
Stressed VaR EE according to stressed exposure calibration
35
CVA Risk Capital Charge

Standardized CVA capital charge
h = 1 (one-year horizon)
Bi and Bind denote the hedging positions in

single-name and indices
The level and reasonableness of the standardised CVA risk capital charge, including a
comparison to the advanced approach, is subject to a final impact assessment targeted
for completion in the first quarter of 2011.
36
10
Dan Rosen
Wrong-Way Risk in Basel III

Banks must identify exposures that give rise to general WWR

Stress testing and scenario analyses to identify risk factors positively

correlated with credit worthiness including severe shocks occurring when
relationships between risk factors have changed
Monitor general wrong way risk by product, by region, by industry, etc.
Reports provided to senior management and Board on a regular basis
Explicit Pillar I charge for identified specific WWR higher EAD

Explicit procedure for identifying, monitoring and controlling specific WWR
Instruments for which there is a legal connection between CP and

underlying issuer and for which specific WWR has been identified are to be
taken out of netting set with other transactions
CDSs: use expected loss assuming underlying in liquidation (LGD for

swap = 100%)
Equity, bond, securities financing: EAD = value of transaction under JtD

38
Analytical CVA and Contributions (Normal Approx.)

Vi (t ) = i (t ) + i (t ) X i
Analytical expressions
Contributions including wrong-way risk

Need to modify the approach to obtain the contributions

to the CP EE conditional on the CP defaulting
Y = 1[ P ( )]
2
X i = bY
i + 1 bi X i
For this purpose, we define a Normal copula
Same results but instead of the unconditional expectations, standard

deviations and correlations of the trade values, we now use the
conditional ones
i (t ) E[ Vi (t ) | = t ] = i (t ) + i (t )bi 1[ P(t ) ]
i (t ) StDev[ Vi (t ) | = t ] = i (t ) 1 bi2
i (t ) =
i (t ) bi (t )
(1 bi2 )[1 2(t )]
39
11
Dan Rosen
CCR Capital and Alpha Methodology

(Garcia et al)
Framework defined by two key components:

Non-parametric sampling of exposures from pre-computed PFEs (unconditional)

Direct modelling of codependence of and exposures and systematic credit factors
(non-parametric exposures sampling also from joint market-credit factor scenarios)
Computationally efficient fully leverages pre-computed PFE profiles

Minimizes work during the most computationally intensive step
Multiple capital calculations model validation, sensitivities, stress testing
Model can be applied within general integrated market-credit risk models
Stress testing
Wrong-way risk and transparency of counterparty concentrations and factors driving

exposures
Market-credit correlations contrast to industry studies, conservative assumptions, or

from a previously estimated market-credit risk model
40
Wrong-Way Risk Correlated Market-Credit

General market-credit codependence framework
CP exposures
(Simulated from market factors)
Credit factors defaults
Copula
Correlation parameters:
Capital
41
12
Dan Rosen
WWR Model at the Portfolio Level

Integrated market and
credit portfolio model
Simulated jointly for entire
portfolio
Copula (X, Z)
Codependence of
exposures and credit events
Credit events
Exposures
(market
scenarios)
Yi = Z + 1 i
Ei = f ( X )
N 1 (PD ) z
PD(Z ) = N
Syst. factor
X
Syst. factor
Z
Idiosyncratic
CP factors
42
Calculating CVA with Wrong-Way Risk

CVA with WWR
CVAWWR = (1 R ) k j D j (t k ) E j (t k ) P ( j , t k 1 < < t k )

M
CVAWWR = (1 R ) k e (t k ) [P(t k ) P(t k 1 )]

Expected exposure
conditional on default
e (t k ) = j D j (t k ) E j (t k )
M
P ( j , t k 1 < < t k )
P (t k ) P(t k 1 )
Analytical formula for EPE | default
Explicit formula for the joint probability... But very expensive

Counterparty PFE
35
(large number of bi-Normal distributions)
Mean Exposure
95 Percentile
30
Cond. EPE
25
Requires numerical evaluation
Depends on the joint market-credit model and the

correlation parameters
Exposure ( Million)
20
15
10
5475
5110
4745
4380
4015
3650
3285
2920
2555
2190
1825
1460
1095
730
365
Time (days)
45
13
Dan Rosen
Methods for Calculating CVA with WWR

Conditioning on the default interval is computationally infeasible.

Requires approximations:
Fixed expected exposure at default (can be shown to be conservative)
Linear Approximation:
When simulating new PD scenarios, calculate CVA using a linear

approximation (in PD) to the REP formula:
CVANew = CVAOld + (PDNew PD Old )
CVA
(PDOld )
PD
46
Calculating CVA with WWR

Based on explicit computations of the derivatives, the linear

approximation algorithm is quite fast
One can show that (from the analytical formulas for the derivatives)
that fixing the expected exposure at default will be conservative
(aggressive) in the presence of wrong-way risk (right-way risk).
CVA
PD
47
14
Dan Rosen
Methods for Calculating CVA with WWR

Conditioning on the default interval is computationally infeasible
Conditioning directly on default exactly at time tk is faster :

CVA i = (1 Ri )
T
0
e * (t)dPi (t)
e * (t) = E[D(t)E (t) | = t]
Avoids computation of cumulative bivariate normal distributions.
Still requires significant computation (inverse normal distributions for

each time, counterparty and simulation scenario)
Accuracy could be a consideration if the time points are far apart
Example: trapezoid Rule (conditioning on exact default time):
e * (t k ) + e * (t k1 )
(P(t k ) P(t k1 ))
k=1
2
D j (t k ) E j (t k ) P( j | i = t k )
CVA (1 Ri )
e * (t k ) =
48
Remarks on WWR at the Portfolio Level

Integrated market and credit portfolio model
While the CVA is the sum of CP CVAs,

Codependence of
exposures and credit events
we must use the same model and
correlation parameters to compute
Credit events
Exposures
CVA at the portfolio level
Ei = f ( X )
Yi = Z + 1 i
N (PD ) z
Under a given model (market factor
PD(Z ) = N
and correlation levels) not all CPs will

simultaneously have WWR
Copula (X, Z)
Stress testing of individual CPs can

be done with different set of parameters
Syst. factor
X
Syst. factor
Z
Idiosyncratic
CP factors
49
15
Dan Rosen
Case Study
Sample portfolio: 70 counterparties
Transactions: FI, FX, equity and credit derivatives (multiple currencies)
PFE profiles - simulated over 30 years using 2,000 market scenarios and 21
time steps (MtF)
Portfolio Exposure Sum mary: Regulatory Capital

One-Year Equivalent Exposures
Calibrated using historical data
One-Year Equivalent Mean Exposures

6
800%
95% Percentile
700%
%5 Percentile
Mean exp
% Mean e xposure
600%
mean reversion for relevant parameters
500%
3
400%
2
300%
Alpha (99.9%): Base Case vs. Stressed Exposures
200%
Run of April, 2008 (26/06/2008)
100%
Single Step
Multi-Steps 59 TS - MS / MS
Multi-Steps 59 TS - MS / SS
1.40
Alpha
1.20
Alpha
1.40
1.30
1.30
1.20
1.10
1.10
1.00
1.00
0.90
0.90
0.80
-1
0.80
-1
1.60
95t h Percentile
5th Percentile
158,032
154,454
127,155
98, 508
95, 401
199,954
238,365
152,864
116,262
110,398
120,191
83,296
102,277
79,307
80,209
-0.25
94, 691
84, 931
79, 592
78, 014
-0.25
59, 223
0 Correlation
0.25
Correlation
1.50
No Count erparties:
Sigma1.40 No CP Exp Zero or Neg:
140,345
91,878
90,347
82,675
0.25
74,456
0.5
51,071
78,495
70,976
73,494
0.75
44,392
0.5
0.75
70
1.40
15.19%
1.30 1.30
30.75%
1.20 1.20
12.23%
11.26%1.10
1.10
9.58%
1.00
28.68%
1.00
4.72%0.90
7.41%
0.90
0.80
3.58%
0.80
15.45%
-1
(99.9%)
StressStatistics
Exposures ('000s) Multi-Steps 12 TS - MS
Mean
Exposure
Portfolio
Size Statisti cs
Single
Step
/ MS
Multi-Steps
59 TS - MS / MS2,176,463
Multi-Steps
12 TS - MS
Total Exposure:
Exposure
> / SS No of CP No of Eff CP
1.50
Top 10 Exposures ('000 Euros)

Mean
A48010615
6EAD4TE
284500046
9CRUPAR
90000001
Y18500690
10048092
280580040
6KHBNYC
-0.75
-0.5
P40010019
5.651.60
Average Mean / Vol:
Counterparty
-0.75 Confidential
-0.5
Client
Base
Case
Alpha
- Systematic
Skew*:
Maximum :
Largest(10):
Smallest(10):
-0.75
-0.5
Minimum:
-1
-0.75
-0.5
-0.25
Statistics for CP Exposure > 1 Euro

Mean:
31,092
Median:
15,947.26
STD:
33,411
Kurtosis*:
4.53
HI
70
32
0.031
100,000
69
31
0.032
1M
69
31
0.032
Effective C ounterparty N umber

40
No of Eff CP
Average Stress
% Vol:Exposures 17.71%
1.50
Exposure ('000s)
1.70
A lpha
1.50
Run of April, 2008 (26/06/2008)
1.80
Counterparty (Top 70 mean ex posures)
- Total (99.9%)
Alpha
Base CaseAlpha
1.60
Alpha (99.9%): Comparison

Single vs Multiple Steps
Alpha - Systematic (99.9%)
Alpha - Total (99.9%)
0%
1.70
Frequency
30
20
2.21
10
158,032
0
59,223
8,505.34
CPs
-0.25
0
0.25
0.5 No of0.75
1
8,053.13
Correlation
0
0.25
0.5 Copyright
0.75
R2 Financial1Tec hnologies 2007
Correlation
Alpha (99.9%) as a function of market-credit correlation

Alpha (99.9%) as a function
of market-credit correlation
Correlation
-1
-0.75
Correlation
-1
-0.75
Alpha Total (LTS/LTD)
-0.5

Base Case
Single Step
0.92
Stressed Exposures
Alpha Systematic (LSS/LSD)
MS / SS
Base Case
Stressed
MS / Exposures
SS
Single Step
MS / SS
MS / SS
0.91
0.91
0.94
0.97
0.96
0.99
1.00
1.06
1.05
-0.5
0.89
0.89
0.92
0.95
0.94
0.97
0.97
0.93
1.00
-0.25
-0.25
0.92
0.95
0.97
0.96
0.99
0.97
0.97
0.97
0.93
0.96
0.99
0.25
0.25
1.04
1.04
1.06
0.99
1.02
0.96
1.00
1.03 0.97
1.07
1.10
1.01
1.06
1.09 1.02
0.96
0.94
1.00
0.96
1.01
1.01
1.00
1.06
1.01
1.06
0.5
0.5
1.12
1.12
1.13
1.15
1.18
1.08
1.13
1.16 1.11
1.26
1.22
1.25
1.18
1.21
1.24 1.25
Client Confidential
1.06
1.03
1.10
1.04
1.09
0.93
0.94
0.99
0.93
0.97
0.93
0.93
0.98
0.94
0.98
1.08
1.08
1.14
1.08
1.13
0.75
0.75
1.21
1.21
1.30
1.30
1.41
1.29
1.33
1.30
1.29
1.33 1.44
1.42
1.42
1.63
1.39
1.43
1.42
1.38
1.42 1.74
Copyright R2 Financial Technologies 2008
1.18
1.16
1.23
1.16
1.21
Client Confidential
1.30
1.24
1.32
1.26
1.31
1.42
1.37
1.45
1.34
1.40
51
Portfolio Exposures
Portfolio Exposure Summary: Regulatory Capital

6
300%
95% Percentile
5
%5 Percentile
% Mean exposure
Mean exp
200%
3
150%
2
100%
Frequency
250%
50%
0%
Exposure ('000s)
Counterparty (Top 70 mean exposures)
17.71%
Average Mean / Vol:
5.65
Mean Exposure Statistics ('000s)

Total Exposure:
2,176,463
No Counterparties:

Counterparty
Mean
95th Percentile
5th Percentile
Sigma
P40010019
158,032
154,454
127,155
98,508
95,401
94,691
84,931
79,592
78,014
59,223
199,954
238,365
152,864
116,262
110,398
140,345
91,878
90,347
82,675
74,456
120,191
83,296
102,277
79,307
80,209
51,071
78,495
70,976
73,494
44,392
15.19%
30.75%
12.23%
11.26%
9.58%
28.68%
4.72%
7.41%
3.58%
15.45%
1
A48010615
2
6EAD4TE
3
284500046
4
9CRUPAR
5
90000001
6
Y18500690
7
10048092
8
280580040
9
6KHBNYC
10
No CP Exp Zero or Neg:

Statistics for CP Exposure >
Mean:
Median:
STD:
Kurtosis*:
Skew*:
Maximum :
Largest(10):
Smallest(10):
Minimum:
Client Conf idential
Portfolio Size Statistics

Exposure >
70
1 Euro
31,092
15,947.26
33,411
4.53
2.21
158,032
59,223
8,505.34
8,053.13
No of CP No of Eff CP
HI
70
32
0.031
100,000
69
31
0.032
Effective Counterparty Number

40
No of Eff CP
Average % Vol:
30
20
10
0
No of CPs
52
16
Dan Rosen
Counterparty Level Exposures
Counterparty Report: Exposure and CVA

Run of December, 2009 (18/10/2010 CP level)
400
Mean Exposure
350
Cond. Mean Exposure
3.20
Hazard Rate
HR Volatility
3.10
Asset
Correlation
300
95 Percentile
CVA ( Million)
Exposure ( Million)
250
200
150
100
50
0
Mean Exposure
Cond Mean Exposure
95 Percentile
80
3.00
40
20
0.25
-0.50
1.36
0.25
0.50
0.75
5475
5110
4745
4380
4015
3650
3285
2920
0.50
3.20
2555
2190
CVA - WWR Stress Test ( million)

-0.50
-0.25
1
0.25
2.93
3.00
3.06
3.13
1825
0
Correlation
1460
1.31
-0.25
1095
-0.75
2.87
60
730
-1
2.80
42.88
35.50
59.35
2.81
3.44
Statistics ( million)
Exposure
2.90
Actual Exposure
EPE
2.80
Effective EPE
Effective Maturity*
2.70
Total Capital
CVA
Mkt-2.60
Credit Corr.
-1
-0.75
CVA Unilateral
CVA Bilateral
CVA Uncorrelated
Correlation
CVA
0.024
0.0500
0.2149
Exposure
Testing
365
5475
Time in Days
5110
4745
4380
4015
3650
3285
2920
2555
2190
1825
1460
1095
730
365
Exposure
Actual Exposure
304.64
EPE
158.03
Effective EPE
305.84
Effective Maturity*
1.57
Total Capital
8.51
CVA
Market-Credit Corr.
0.25
CVA Unilateral
3.13
CVA Bilateral
CVA Uncorrelated
3.06
Counterparty Info
CVA Stress
Counterparty
6MPEBTQ
No of3.40
Instruments
11
120
Sector
INDUSTRIALS
BBB3.30 Rating
PD
0.3059%
100
LGD
0.40
Exposure
( Million)
Counterparty Info
Counterparty
A48010615
No of Instruments
111
Sector FINANCIALS
Rating
BBB+
PD
0.1367%
LGD
0.40
Hazard Rate
0.024
HR Volatility
0.0500
Asset Correlation
0.2149
Time in Days 1
0.75
3.26
3.33
53
CCR Capital (Independent Market-Credit)

CCR Losses and EC Report
(Numbers in Million)
Run of December, 2009 (18/10/2010)
CCR Losses and EC
Total (Stochastic) Loss Histogram
130
1800
120
Deterministic
Deterministic - Syst
110
Stochastic
Stochastic - Sys
1600
1400
Frequency (Thousands)
100
90
VaR
80
70
60
50
40
1200
1000
800
600
30
400
20
200
10
0
VaR 90%
VaR 95%
VaR 99%
VaR 99.5% VaR 99.9%
Quantile
OTC Derivatives Credit Capital

EL
Det - SA
Systematic
Percent
Stoch - SA*
Systematic
Percent
* Correlation = 0
4.42
4.42
100%
4.42
4.42
100%
Capital
111.81
58.59
52%
118.33
59.18
50%
Sigma
VaR 90%
VaR 95%
VaR 99%
VaR 99.5%
VaR 99.9%
ES 99.9%
11.68
6.26
54%
12.04
6.30
52%
14.91
10.07
68%
14.59
10.11
69%
23.99
14.87
62%
24.21
14.93
62%
59.85
30.27
51%
57.90
30.42
53%
71.54
38.72
54%
76.62
38.83
51%
116.23
63.01
54%
122.74
63.60
52%
150.70
82.42
55%
157.30
82.95
53%
Client Confidential
(Simulation: 1M systematic scenarios)

54
17
Dan Rosen
CCR Capital WWR Correlated Market-Credit

Wrong-Way Risk CCR Capital Stress Test: Alpha (99.9%)

1.60
1.40
VaR Based
1.20
Capital Based
1.00
1.40
VaR Based
1.20
Capital Based
Alpha
Alpha
1.00
0.80
0.80
0.60
0.60
0.40
0.40
0.20
0.20
0.00
0.00
-1
-0.75
-0.5
-0.25
0
Correlation
0.25
0.5
0.75
-1
-0.75
-0.5
-0.25
0
Correlation
0.25
0.5
0.75
Alpha Multiplier by Correlation level at 99.9% (Between Exposures and Credit Events)
Correlation
-1
-0.75
-0.5
-0.25
0.25
0.5
0.75
VaR Based
0.89
0.92
0.97
1.01
1.06
1.11
1.16
1.22
1.28
Capital Based
0.89
0.92
0.97
1.01
1.06
1.12
1.16
1.22
1.29
0.81
0.81
0.85
0.84
0.90
0.89
0.95
0.95
1.01
1.01
1.07
1.07
1.14
1.15
1.22
1.23
1.32
1.34

VaR Based
Capital Based
Client Confidential
Alpha <1.2 correlations ~ 75% (Basel II)

Negative correlations right-way exposures (alpha < 1.0)
Systematic alpha more sensitive to market-credit correlation (no idiosyncratic risk)

55
CCR Capital WWR Correlated Market-Credit

Exposures and Ordered Scenarios Market factor correlated to defaults
Run of December, 2009 (18/10/2010)
Ordered Scenarios based on Total Exposure

900
880
Total Exp osure
Mo vin g Avg. Tren dline
Exposure (millions)
860
840
820
800
780
760
740
720
Important to understand why?

Portfolio may have right-way or
wrong-way exposures? may change
over time
In practice, can find smile effect
some CPs are positively correlated
and some negatively correlated
Exposure factors include PCs, EL
Total exposure
(TE is generally the most
conservative)
700
151
301
451
601
751
901
Ordered Scenario (First PC)
Scenario Statistics
No Scenarios:
Maximum*:
Mean*:
Median*:
STD*:
Minimum*:
* million
2,000
1,144.17
885.37
880.52
53.41
752.61
Client Conf idential
Principal Components
PC
Explained Variation
First
69.60%
Second
14.95%
Third
5.75%
57
18
Dan Rosen
CCR Regulatory Capital Internal Model
58
Example 2: Stressed Exposures

Run of April, 2008 (26/06/2008)
1.70
1.60
Base Case
1.70
Base Case
1.50
Stress Exposures
1.60
Stress Exposures
1.50
Alpha
1.40
Alpha
1.80
1.30
1.20
1.40
1.30
1.20
1.10
1.10
1.00
1.00
0.90
0.90
0.80
0.80
-1
-0.75
-0.5
-0.25
0
Correlation
0.25
Alpha (99.9%) as a function of market-credit correlation

Correlation
-1
-0.75
Base Case
0.91
0.89
Stressed Exposures
Base Case
Stressed Exposures
0.5
0.75
-1
-0.75
-0.5
-0.25
0
Correlation
0.25
0.5
0.75
-0.5
-0.25
0.25
0.5
0.75
0.92
0.97
1.04
1.12
1.21
1.30
1.42
1.00
0.97
0.97
0.99
1.06
1.13
1.26
1.41
1.63
1.06
1.05
0.93
1.00
0.93
0.96
0.96
0.97
1.01
1.02
1.08
1.11
1.18
1.25
1.30
1.44
1.42
1.74
Client Confidential
59
19
Dan Rosen
Empirical Market-Credit Correlations

Historical time series: market index, implied credit driver and default rates (S&P data)
Historical Default Rates (1981-2007)
Correlation between all ratings and

investment only
Default rates = 78%
Implied Credit factors = 70%
4.5
4
Def Rate ALL (%)

Def Rate INV (%) X 10
3.5
3
2.5
2
Correlation between credit factor and

market index
= 23%
All ratings
Investment grade = 29% *
1.5
1
0.5
0
1981
1986
1991
1996
2001
2006
EQ Inde x vs. ALL Grades
EQ Index vs. Investment Grade
4.000
4.00
Equity Index
3.000
Equity Index
Systematic Credit factor
default rate (%) X 10

2.00
1.000
1.00
0.000
0.00
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
1981
-1.000
-1.00
-2.000
-2.00
Systematic Credit factor
3.00
Default Rate (%)

2.000
1986
1991
1996
2001
2006
66
CVA Some Assumptions for CVA

For simplicity, use same exposures as for CCR capital (not risk-neutral)
Credit model
Constant risk-neutral HR per rating (real PDs also per rating and higher
than we have used in the past at BBVA)
Portfolio Exposure Sum mary: Regulatory Capital
LGDs from spread pricing
6
95% Percentile
700%
%5 Percentile
Mean exp
600%
Asset correlation Basel II
% Mean exposure
800%
Base market-credit correlation =25%
500%
3
400%
Alpha - Systematic
Alpha
(99.9%): Comparison
Single(99.9%)
vs Multiple Steps
1.80
200%
1.70
0%Stress Exposures
1.50
1.50
1.40
1.40Multi-Steps 59 TS - MS / MS
Single Step
1.50 Single Step
1.50
17.71%
1.20
1.30
1.00
0.90
0.80
0.90
-1
0.80
-1
-0.75
Counterparty
Mean
95t h Percentile
5th Percentile
A48010615
6EAD4TE
284500046
9CRUPAR
158,032
154,454
127,155
98, 508
199,954
238,365
152,864
116,262
120,191
83,296
102,277
79,307
90000001
-0.75
-0.5
Y18500690
10048092
-0.5
-0.25
280580040
95, 401
-0.25
0
94, 691
Correlation
84, 931
0 592
0.25
79,
110,398
0.25
140,345
0.5
91,878
0.5
90,347
0.75
Alpha (99.9%) as a function of market-credit

correlation
Correlation
6KHBNYC
78, 014
82,675
Correlation
-1
-0.75
74,456
P40010019
59, 223
Alpha (99.9%)
as aTotal
function
of market-credit correlation
Alpha
(LTS/LTD)
Client
Confidential
Correlation
-1
-0.75
Daily volatility returns 3-5%
Flat market factor correlations 40%
Base Case

Stressed Exposures
Single Step
0.91
0.94
MS / SS Base Case0.97
Stressed
Multi-Steps 59 TS - MS
/ MS Exposures0.96
MS / SS
0.99
Single Step
MS / SS
MS / SS
1.06
1.03
1.10
1.04
1.09
-0.5
80,209
0.75
51,071
78,495
1
70,976
73,494
-0.5
44,392
-0.25
0.92
-0.2515.45%
0.97
0.89
0.97
0.95
0.930.97
1.00 0.96
0.99
0.99
0.931.02
0.96 1.00
1.03
1.07
0.961.10
0.97 1.06
1.09
0.93
0.94
0.99
0.93
0.97
0.93
0.93
0.98
0.94
0.98
0.96
0.94
1.00
0.96
1.01
1.01
1.00
1.06
1.01
1.06
0.97
0.99
1.04
1.04
1.06
0.25
0.5
Minimum:
0.25
1.12
1.12
1.13
8,053.13
0.5
1.21
1.15
1.22
1.01 1.18
1.08 1.25
1.02 1.13
1.11 1.21
Client Confidential
1.16
1.24
1.08
1.08
1.14
1.08
1.13
Client Confidential
70
32
HI
0.031
0.032
0.032
1.00
0.92
1.060.95
1.050.94
0.97
0.97
No of CP No of Eff CP
Sigma1.10 No CP Exp Zero or Neg:

100,000
69
31
15.19%
Statistics for CP Exposure > 1 Euro
1M
69
31
1.00
30.75%
Mean:
31,092
Effective C ounterparty N umber
12.23%0.90
Median:
15,947.26
40
11.26%
STD:
33,411
30
0.80
0.90 9.58%
Kurtosis*:
4.53
20 0.25
-1
-0.75
-0.5
-0.25
0
0.5
0.75
1
1
28.68%
Skew*:
2.21
Correlation 10
0.80 4.72%
Maximum :
158,032
0 0.5
-17.41% -0.75
-0.5Largest(10):
-0.25
0
0.25
0.75
1
59,223
Co rrelation
3.58%
Smallest(10):
8,505.34
1.10
0.91
0.92
Exposure >
1.20
1.00
0.89
Portfolio Size Statisti cs
No of Eff CP

1.10
1.10
1.40
Average Mean / Vol:
Exposure ('000s)
1.40 Multi-Steps 59 TS - MS / SS
5.65
Mean Exposure Statistics ('000s)
1.30
Total Exposure:
2,176,463
1.20
No Count erparties:
70
A lpha
Average % Vol:
1.20
1.00
(and not the spreads)
1.30
Alph a
Alpha
Market risk factors hazard rates
Alp ha
1.30
Base Case
Alpha
- Systematic (99.9%)
Stress Exposures
1.60
1.60
Counterparty
Multi-Steps
12 TS (Top
- MS 70
/ SSmean ex posures)
Run of April, 2008 (26/06/2008)
1.70
100%Base Case
1.60
Run of April, 2008 (26/06/2008)
300%
Freque ncy
1.18
1.16
1.23
1.16
1.21
1.21
1.26
0.75
1.30
No
1 of CPs
0.75
1.30
1.41
Copyright R2 Financial Tec hnologies 2007
1.42
1.42
1.63
1.29
1.39
1.18 1.33
1.30 1.43
1.42
1.25 1.29
1.44 1.38
1.74
1.33
1.42
1.30
1.24
1.32
1.26
1.31
1.42
1.37
1.45
1.34
1.40
Stand-alone VaR computed analytically, and simulation for portfolio VaR
72
20
Dan Rosen
Portfolio CVA
Portfolio CVA Summary
Portfolio Summary ( million)
No of CPs
70
Mkt-Credit Corr.
0.25
Mean
Median
STD
Kurtosis*
Skew*
Maximum
Largest 10
Smallest 10
Minimum
1.08
0.39
2.57
41.22
5.95
19.76
1.46
0.10
0.004
2,291
3,882
2,176
75.80
55.53
13.44
CVA by Counterparty
25
20
( Million)
Mark-to-Market
Actual Exposure
EPE
CVA
Unilateral
Bilateral
Capital
CCR Capital
CVA VaR
CVA Statistics ( million)

Total CVA
75.80
15
10
5
0
Counterparties
CVA Stress Testing

78.00
77.00
CVA
CVA Concentration
76.00
( Million)
75.00
74.00
Central
Bank, 0.34
Internationa
l Corporates,
41.18
73.00
Large
Domestic
Corporates,
8.48
Other
Corporates,
6.00
72.00
71.00
70.00
-1
-0.75
-0.50
-0.25
0
Correlation

Correlation
-1
-0.75
-0.50
CVA
73.04
73.60
74.13
-0.25
74.68
0.25
0
75.23
0.50
0.25
75.80
0.75
0.50
76.38
Financials,
39.69
0.75
76.96
Project
Finance,
22.86
1
77.54
73
Counterparty Exposure, CVA, and WWR

Counterparty Report: Exposure and CVA
Run of December, 2009 (18/10/2010 CP level)
Counterparty Info
Counterparty
6MPEBTQ
No of Instruments
11
INDUSTRIALS
Sector
Rating
BBBPD
0.3059%
LGD
0.40
Hazard Rate
0.024
HR Volatility
0.0500
Asset Correlation
0.2149
1.60
Mean Exposure
100
1.50
Cond Mean Exposure

95 Percentile
1.40
(CVA Million)
80
( Million)
42.88
35.50
59.35
2.81
3.44
120
60
1.30
1.20
40
1.10
20
1.00
0.25
1.36
-1
-0.75
-0.50
Time in Days
-0.25
0.25
0.50
0.75
Correlation
5475
5110
4745
4380
4015
3650
3285
2920
2555
2190
1825
1460
1095
730
1.31
365
Exposure
Actual Exposure
EPE
Effective EPE
Effective Maturity*
Total Capital
CVA
Mkt- Credit Corr.
CVA Unilateral
CVA Bilateral
CVA Uncorrelated
CVA Stress Testing
Exposure
Correlation
CVA
-1
1.08
-0.75
1.14

-0.50
-0.25
1
0.25
1.20
1.26
1.31
1.36
0.50
1.41
0.75
1.45
1
1.48
74
21
Dan Rosen
CVA Market VaR
77
Base Case Results

Independent market and credit risk.

7.00E+06
6.00E+06
5.00E+06
4.00E+06
Fixed ExpEAD
Full Internal Model (Trap)
3.00E+06
Linear Approximation
2.00E+06
1.00E+06
0.00E+00
VaR 0.90 VaR0.95 VaR 0.99 VaR 0.995 VaR 0.999
CVaR
0.999
79
22
Dan Rosen
Stress Testing WWR

1-Day VaR at 99% confidence level, for various assumed levels of

market-credit correlation.
Fixed EDPE
Full Internal Model
Linear Approximation
5.10E+06
5.00E+06
4.90E+06
4.80E+06
4.70E+06
4.60E+06
4.50E+06
4.40E+06
4.30E+06
-0.75
-0.5
-0.25
0.25
0.5
0.75
80
Capital Charges
Standardized Capital Charge: 184.56m
Internal model charges (millions) for different correlation levels:
Capital = 3 10 (VaR1 day,0.99 +SVaR1 day,0.99 )

Correlation
-1
-0.75
-0.5
-0.25
0.25
Base Case
87.48
88.11
88.76
89.43
90.13
90.85
Stress Case
109.35
110.14
110.95
111.78
112.66
113.56
0.5
0.75
91.58
92.32
93.08
114.47
115.41
116.35
Base Case : SVaR = VaR

Stress Case : SVaR = 1.5 VaR
81
23
Dan Rosen
Concluding Remarks
83
CVA and Wrong Way Risk

CVA must be priced for derivatives portfolios the crisis showed its
practical role and impact
Conceptually simple, but complex problem in practice
Consequences now reflected in accounting and capital rules
We are just starting to understand its modelling and its financial, regulatory
and management requirementsand impacts
Wrong-way risk is important

Portfolio effects may reduce its systematic impacts (general WWR)
Specific WWR needs to be analyzed with stress testing and individual

counterparty analysis
Basel III regulation is not yet fully aligned with some of the best
practices, but will likely move there over time
84
24
Dan Rosen
CVA and Model Risk

CVA is pricing do we want to achieve pricing-level accuracy
Marginal contributions, real time, securitization of CVAC
ButC how accurate can weC. Or will we do it in the near future?
This is probably the Most complex instrument we have ever priced!
Complex risks
Modelling CCR and CVA requires integrated market-credit models:
10s or 100s of market factors driving exposures over very long horizons
Wrong-way risk
Credit risk of portfolios of very complex and varied derivatives
Mitigation: netting, collateral, margin callsC.
We cant price very well yet synthetic CDOs!
Simple portfolios, standardized instruments, 125 creditsC.
85
Final Lessons
Model risk frameworkC
Acknowledge the heroic assumptions in our models and the

limitation of the information which we can reasonably extract from
the market and quoted prices
Effectively incorporate fundamental credit information, historical data

and expert judgment into the valuation process
Develop explicit model risk and stress testing approaches which can
help us understand better
The behaviour of instruments and portfolios,
Knightean uncertainties we could be facing.
90
25
Dan Rosen
Bio Dan Rosen

Dan Rosen is the CEO and co-founder of R2 Financial Technologies and an adjunct professor of
Mathematical Finance at the University of Toronto.
Dr. Rosen lectures extensively around the world on financial engineering, enterprise risk and capital
management, credit risk and market risk. He has authored several patents and numerous papers on
quantitative methods in risk management, applied mathematics, operations research, and has coauthored
two books and various chapters in risk management books (including two chapters of PRMIAs Professional
Risk Manger Handbook). In addition, Dr. Rosen is a member of the Industrial Advisory Boards of the Fields
Institute and the Center for Advanced Financial Studies at the University of Waterloo; the Academic Advisory
Board of Fitch; the Advisory Board of the IAFE; a founder former Regional Director and current steering
committee member of PRMIA in Toronto; and a member of the Oliver Wyman Institute. He is also one of the
founders of RiskLab, an international network of research centers in Financial Engineering and Risk
Management. Dr. Rosen was inducted in 2010 as a fellow of the Fields Institute for Research in Mathematical
Sciences, for his outstanding contributions to the Fields Institute, its programs, and to the Canadian
mathematical community.
Prior to co-founding R2 , Dr. Rosen had a successful ten-year career at Algorithmics Inc., where he held
senior management roles in research and financial engineering, strategy and business development, and
product marketing. In these roles, he was responsible for setting strategic direction, new initiatives and
alliances; the design and positioning of credit risk and capital management solutions, market risk tools,
operational risk, and advanced simulation and optimization, as well as their application to industrial settings.
He holds an M.A.Sc. and Ph.D. in Chemical Engineering from the University of Toronto.
93
Selected Recent Publications

Rosen D. , 2010, Rethinking Valuations, in Rethinking Risk Measurement (Ed. K. Boecker),

RISK Publications
Rosen D. and Saunders D. 2011, Structured Finance Valuation and Risk Management with
Implied factor Models, in Advances in Credit Derivatives, Bloomberg Publications
Nedeljkovic, J., Rosen D. and Saunders D. 2010, Pricing and Hedging CLOs with Implied
Factor Models, Journal of Credit Risk, fall issue
Rosen D. and Saunders D. 2009, Valuing CDOs of Bespoke Portfolios with Implied MultiFactor Models, Journal of Credit Risk, Fall Issue
Rosen D. and Saunders D. 2011, Wrong-Way CVA and CVA VaR, working paper
Pykhtin M., Rosen D. 2010, Pricing Counterparty Risk at the Trade Level and CVA
Allocations, Federal Reserve Research Paper Series (Journal of Credit Risk)
Rosen D. and Saunders D. 2010, Computing and Stress Testing Counterparty Credit Risk
Capital, in Counterparty Credit Risk Modelling, (ed. E. Canabarro), Risk Books
Garcia Cespedes J. C., de Juan Herrero J. A., Rosen D., Saunders D. 2010, Effective
modelling of Counterparty Credit risk Capital and Alpha, Journal of Risk Model validation
De Prisco B., Rosen D., 2005, Modelling Stochastic Counterparty Credit Exposures for
Derivatives Portfolios, Counterparty Credit Risk (M. Pykhtin, Editor), Risk Books
94
26
Dan Rosen
Selected Recent Publications

Rosen D. and Saunders D. 2010, Economic Capital, in Encyclopedia of Quantitative Finance
Rosen D. and Saunders D. 2010, Risk Contributions and Economic Credit Capital Allocation,
in Advances in Credit Derivatives, Bloomberg Publications (forthcoming)
Rosen D. and Saunders D. 2010, Measuring Capital Contributions of Systemic Factors in

Credit Portfolios, Journal of Banking and Finance
Rosen D. and Saunders D. 2009, Analytical Methods for Hedging Systematic Credit Risk
with Linear Factor Portfolios, Journal of Economic Dynamics and Control
Mausser H. and Rosen D. 2007, Economic Credit Capital Allocation and Risk Contributions,
in Handbook of Financial Engineering (J. Birge and V. Linetsky Editors)
Garcia Cespedes J. C., Keinin A., de Juan Herrero J. A. and Rosen D. 2006, A Simple
Multi-Factor Factor Adjustment for Credit Capital Diversification, Special issue on Risk
Concentrations in Credit Portofolios (M. gordy, editor) Journal of Credit Risk, Fall 2006
Rosen D., 2004, Credit Risk Capital Calculation, in Professional Risk Manager (PRM)
Handbook, Chapter III.B5, PRMIA Publications
Aziz A., Rosen D., 2004, Capital Allocation and RAPM, in Professional Risk Manager (PRM)
Handbook, Chapter III.0, PRMIA Publications
95
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Dan Rosen

RiskLab Madrid, May 2011

CVA, Basel III and

2006-2011 R2 Financial Technologies

Regulatory Capital and CVA

Mark-to-market losses due to credit valuation

2006-2011 R2 Financial Technologies

RiskLab Madrid, May 2011

CCR, CVA, management of CVA

CCR capital and Basel III

Wrong-way risk (WWR)

Computing CVA and CVA VaR

Wrong-way risk methodology

2006-2011 R2 Financial Technologies

Counterparty Credit Risk Evolution

2006-2011 R2 Financial Technologies

CCR valuation: CVA

RiskLab Madrid, May 2011

Pricing CCR: Credit Value Adjustment (CVA)

CVA is the market value of counterparty credit risk

CVA is an integral component of the value of derivatives

Now an integral part of accounting rules, and Basel III

CVA is measured at the counterparty level

In addition to credit spreads (and competition) the CVA charged on a particular

Methodology used to determine exposures

2006-2011 R2 Financial Technologies

CVA and Risk Management

Banks currently calculate and manage CVA according to different

Some banks have opted for central CVA desk

CVA desks sell full counterparty credit insurance to the derivatives

Manage the risks of the CVA after inception of the trades

RiskLab Madrid, May 2011

Counterparty exposure: economic loss incurred on all outstanding

Cost of replacing or hedging the contracts at the time of default

More generally, exposures can also be defined as potential losses on credit

Example: a pay-fix IRS with negative MtM has current exposure = 0.

2006-2011 R2 Financial Technologies

Value of the CP portfolio at t

Gross CP-level exposure (netting not allowed)

Netted CP-level exposure (single agreement)

CP-level (margined) E (t ) = max {V (t ) C (t ), 0}

Lagged collateral C (t ) = max V (t t ) H ,0

CP portfolios with multiple netting agreements and trades outside of the

2006-2011 R2 Financial Technologies

RiskLab Madrid, May 2011

CCR Credit Risk Model Components

2006-2011 R2 Financial Technologies

CCR and Potential Future Exposures (PFEs)

Peak Exposure (95%)

Source: de Prisco and Rosen (2005)

RiskLab Madrid, May 2011

Credit Losses and CVA

Unilateral CP-level CVA the banks discounted loss due to the CP

CVA obtained by discounting losses and applying the expectation

CVA = (1 R ) dP(t ) e(t )

Calculating Exposures and CVA by Simulation

Banks use Monte Carlo simulation in practice to obtain the distribution of

Dependence of exposure on the counterpartys credit quality can be

Conditional expectations in the CVA formulae can be replaced by the unconditional

E.g. using a joint process with stochastic intensities, or a copula methodology as in

Need to make model computationally efficientC

2006-2011 R2 Financial Technologies

RiskLab Madrid, May 2011