CDS Pricing Under Basel III: Capital Relief and Default Protection

Pricing Credit Default Swaps Under Default Correlations and Counterparty Risk ∗

In this paper, we develop a generalized affine model to characterize correlated credit risk of multi-firms. When valuing credit derivatives, this new approach allows to incorporate correlative market and credit risk, interdependent default risk structure and counterparty risk into consideration. We have demonstrated our affine model not only combines the existing structural models and intensity...

Comparing Alternate Methods for Calculating CVA Capital Charges under Basel III

The global financial crisis brought counterparty credit risk and CVA very much into the spotlight. The Basel III proposals first published in December 2009 [2] introduced changes to the Basel II rules [1] including a new capital charge against the volatility of CVA. As the Basel committee noted, two thirds of the counterparty risk related losses during the credit crisis were actually from CVA v...

New Basel Capital Accord

Determination of the adequate capital for default protection under the one-factor Gaussian term structure model

In practice, credit risk is measured by one of the two di€erent methodologies. One measures the prices and sensitivities of the credit linked instruments. Another measures the required collateral or capital needed to cover a potential default loss. This paper introduces a pricing methodology, which also determines the required capital. Conventionally the value-at-risk method is used to determin...

Counterparty Credit Risk in OTC Derivatives under Basel III

Recent financial crises were the root of many changes in regulatory implementations in the banking sector. Basel previously covered the default capital charge for counterparty exposures however, the crisis showed that more than two third of the losses related to this risk emerged from the exposure to the movement of the counterparty’s credit quality and not its actual default therefore, Basel I...