Créer un site internet

Variable Exposure Approach


Cva cds


This approach estimates CVA as the hypothetical cost to purchase credit protection, depending on the forecast exposure of the derivative.

Forecasting does not require simulation as it is based on the assumption that markets evolve according to current forward/futures prices.

Therefore, volatility of market variables is not taken into account.

At each CF date of the derivative, the fair value of the remaining CFs is calculated.

The variable exposure approach then sums the costs of buying CDS protection for the future exposure between consecutive CF dates.

Example: if the payment frequency of the derivative is quarterly, the maturity of each CDS would be 3 months. 



CDSt = CDS with a notional principal equal to the PV of the remaining CFs of the derivative at time t.

In case the PV of the remaining CFs at a time point is a liability, own credit spreads are used to value the default leg of the CDS.

Otherwise, credit spreads of the counterparty are used. The PV of the premium leg is used for calculating CVA. 


- methodology takes both current and future exposure into account 

- considers bilateral nature of derivatives 

- can be applied on transactional level or counterparty level 

- Market-observable CDS spreads are directly used for CDS pricing, not requiring assumptions to convert to PD

- intuitive appeal as the CVA is the cost of purchasing credit protection



- Does not account for potential future exposure, as it does not consider any variability of market variables that influence derivative fair value


Add a comment


The NEW website is OUT! 

Go have a look at

You will find the content in the 'Derivatives Academy' section in a book format. 
The full content is not yet available as I am rewriting it and improving it.

You can try the Exotic Derivatives pricer under the 'Derivatives Pricer' section ( I will speed up the page soon as I forgot to compress some images.
Each application allows you to price differents products and contains links towards the correct section of the book. 
You will then be able to get practical and theoretical knowledge quite easily.

I teach quite often using the pricer. You can get so much information and answers to your questions thanks to it.

Take advantage of it as much as you can to hone your knowledge!

If you are looking for junior opportunities in the field of market finance. Register yourself on the website. It's free!

If you have any questions, do not hesitate to contact me on