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Risk Modeling and Capital: Counterparty Credit Risk (“EPE” and “CVA”)

In: Bank Management and Control

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  • Johannes Wernz

Abstract

Investments in derivatives bear Market Risk (e.g., option price movements due to the movements of the underlying stock) and Credit Risk (e.g., creditworthiness of the issuer (seller) of an option or the counterparty of a swap). Credit Risk in this context is usually referred to as Counterparty Credit Risk (CCR), counterparties are usually other banks. For pricing purposes different models and algorithms are used (see below). The cash flows, exposures, and the likelihood of the payments (creditworthiness of counterparties) need to be considered. Accounting (like IFRS 13) is often closely related to valuation/pricing.

Suggested Citation

  • Johannes Wernz, 2020. "Risk Modeling and Capital: Counterparty Credit Risk (“EPE” and “CVA”)," Management for Professionals, in: Bank Management and Control, edition 2, chapter 0, pages 71-77, Springer.
    • Handle: RePEc:spr:mgmchp:978-3-030-42866-2_5
    DOI: 10.1007/978-3-030-42866-2_5
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