modelling counterparty credit risk in czech interest rate swaps

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ID: 252687
2017
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Abstract
According to the Basel Committee’s estimate, three quarters of counterparty credit risk losses during the financial crisis in 2008 originate from credit valuation adjustment’s losses and not from actual defaults. Therefore, from 2015, the Third Basel Accord (EU, 2013a) and (EU, 2013b) instructed banks to calculate the capital requirement for the risk of credit valuation adjustment (CVA). Banks are trying to model CVA to hold the prescribed standards and also reach the lowest possible impact on their profit. In this paper, we try to model CVA using methods that are in compliance with the prescribed standards and also achieve the smallest possible impact on the bank’s earnings. To do so, a data set of interest rate swaps from 2015 is used. The interest rate term structure is simulated using the Hull-White one-factor model and Monte Carlo methods. Then, the probability of default for each counterparty is constructed. A safe level of CVA is reached in spite of the calculated the CVA achieving a lower level than CVA previously used by the bank. This allows a reduction of capital requirements for banks.
Reference Key
kivnkov2017actamodelling Use this key to autocite in the manuscript while using SciMatic Manuscript Manager or Thesis Manager
Authors ;Lenka Křivánková;Silvie Zlatošová
Journal Talanta
Year 2017
DOI
10.11118/actaun201765031015
URL
https://acta.mendelu.cz/65/3/1015/
Keywords Keywords not found

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