Credit Valuation Adjustment Modelling in Theory and Practice
|Author:||Mgr. Lenka Markvartová|
|Year:||2015 - summer|
|Leaders:|| prof. PhDr. Petr Teplý Ph.D.
|Work type:|| Finance, Financial Markets and Banking
|Awards and prizes:|
|Abstract:||This thesis explores the concept of credit valuation adjustment (CVA) focusing on the regulatory CVA
capital charge. Regulatory CVA capitalizes the risk of losses due to deterioration in a counterparty’s
credit quality within a bilateral OTC trade. The two approaches defined in Basel III, the standardized
and the advanced method, are analyzed and compared. The individual steps in the complex advanced
method are uncovered and a simplified methodology is suggested, replacing banks’ internal models.
Capital charges are computed under both methods for several hypothetical portfolios. Furthermore,
sensitivities of both models to trade parameters are quantified as well as the effect of risk mitigators such
as netting and collateral. Finally, the role of the correlation between counterparties is explored.