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Published in:
2020 | OriginalPaper | Chapter
5. Risk Modeling and Capital: Counterparty Credit Risk (“EPE” and “CVA”)
Author : Johannes Wernz
Published in: Bank Management and Control
Publisher: Springer International Publishing
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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.