Menu
Member area
Derniers billets
No items to display
Blog
Annuaire
Vidéos récentes
No items to display
Vidéos
Derniers messages
No items to display
Forum
- Volatility Derivatives 1
- The world of Structured Products 4
- Library of Structured Products 0
- Table of Contents
- Vanilla Options
- Volatility, Skew and Term Stru
- Option Sensitivies: Greeks
- Option Strategies
- Correlation
- Dispersion Options
- Barrier Options
- Digitals
- Autocallable Structures
- The Cliquet Family
- Home /
- Risk Management /
- CVA /
- Credit risk modeling for derivatives /
- Swaption Approach /
- Swaption Approach
Swaption Approach
Formula:
The swaption approach models EPE as a series of swaptions and is only applicable where the derivative is an IR swap.
Simplistically, the exposure is modelled as:
- an option on a reversed swap in case the counterparty defaults before the first CF date +
- + an option on the reversed swap excluding the first CF in case the counterparty defaults between the first and second CF dates
- etc...
The number of swaptions is determined by the remaining term of the contract and the payment frequency.
Terms:
Swaptiont = fair value of an option with expiry t on a swap opposite to the derivative, with maturity T – t.
PD(t-1, t) = probability of default between time t – 1 and t.
The CVA calculation utilises counterparty PDs, while for DVA own PDs are used.
Advantages:
- methodology takes both current and potential future exposure into account
- considers bilateral nature of derivatives
- can be applied on transactional level
- terms of swaptions are easy to determine
- intuitive appeal as the CVA is based on the cost of replacing the asset
Disadvantages:
- applies to IR swap exposures only
- difficulty to apply on counterparty level, especially when exposure to counterparty includes derivatives other than IR swap.