Researcher course in risk management
Counterparty Credit Risk and CVA
Counterparty credit risk as banks measure it: simulating future exposure of a derivatives book, netting and collateral, credit valuation adjustment and its siblings DVA, FVA and KVA, wrong-way risk, and the capital rules built on them.
Counterparty credit risk is the risk that the other side of a trade defaults while it owes you money. Every bank with a derivatives book measures it daily, prices it into each trade as a credit valuation adjustment, and holds capital against it. This course teaches the simulation, the adjustments and the rules.
Why is exposure the hard part?
Because what a counterparty will owe you in a year depends on where markets go. A bank therefore simulates thousands of market paths, values its whole book with that counterparty on each, applies netting and collateral, and only then knows its exposure. The course builds that engine for a small swap book.
How is the course taught?
Audio lessons give the general subject, explainer films show exposure profiles growing and shrinking with collateral, and the workbooks hold worked examples, notebooks and cheat sheets of the regulatory formulas. Assignments and the project receive written feedback from the faculty.
Who is this course for?
Quants and risk analysts heading for XVA desks, counterparty risk or model validation. It counts toward the Certificate in Quantitative Risk Management and so toward the Fellowship in Computational Finance.
What you will be able to do
- Simulate expected and potential future exposure for a portfolio of swaps and options.
- Apply netting sets and collateral agreements and measure their effect on exposure.
- Compute CVA and DVA from exposure profiles and credit curves, and explain FVA and KVA.
- Identify wrong-way risk and outline the regulatory capital for counterparty risk.
Syllabus, module by module
What counterparty risk is
Bilateral and cleared trades, default of a counterparty and replacement cost.
Exposure
Simulating mark-to-market paths; expected, peak and potential future exposure.
Netting and collateral
ISDA netting sets, CSA terms, margin periods of risk and initial margin.
CVA and DVA
The valuation adjustment from exposure, default probability and recovery.
The other adjustments
Funding, capital and margin valuation adjustments and the debate around them.
Wrong-way risk and capital
When exposure and default rise together; SA-CCR and CVA capital.
How the certificate is earned
Graded assignments and a final project: an exposure simulation and CVA calculation for a small swap book with and without collateral. On a pass you receive the Course certificate in Counterparty Credit Risk and CVA, issued by the Institute with a verification code. Read how certification works.
Before you start
Credit default swaps and Value at Risk at the Institute's level.
This course counts toward
- Certificate in Quantitative Risk ManagementA financial risk management certification in one semester of eleven courses and a capstone on measuring and governing market and credit risk: VaR and expected shortfall, volatility models, stress tests, credit and counterparty risk, bank capital and the validation of the models themselves.
- Fellowship in Computational FinanceThe top credential on the researcher path. Four semesters, 38 courses, and a dissertation supervised in writing and examined by two faculty members.
Questions applicants ask
What is CVA?
Credit valuation adjustment is the reduction in a derivative’s value for the chance that the counterparty defaults while owing you money. It is computed from simulated future exposure, the counterparty’s default probabilities and the expected recovery.
Why did counterparty credit risk become so important?
In 2008 most bank losses on derivatives came from changes in CVA rather than from defaults themselves. Regulators then added a CVA capital charge, and banks built desks to manage it.