An Accurate Solution for Credit Value Adjustment (CVA)

An Accurate Solution for Credit Value Adjustment (CVA)

Postby huawei » Mon Jun 10, 2013 9:14 pm

This paper uses a Monte Carlo simulation approach for credit value adjustment (CVA) that is a relatively new area of financial derivative modeling and trading. In contrast to previous studies, the model relies on the probability distribution of a default time/jump rather than the default time itself, as the default time is usually inaccessible. As such, the model can achieve a high order of accuracy with a relatively easy implementation. We find that the prices of risky contracts are normally determined via backward induction when their payoffs could be positive or negative. Moreover, the model can naturally capture wrong or right way risk.



See http://papers.ssrn.com/sol3/papers.cfm? ... id=2267508
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