Structural estimation of counterparty credit risk under recovery risk

Counterparty Credit Risk (CCR) represents one of the major sources uncertainty in many financial contracts. The role credit value adjustment (CVA) is, fact, that rewarding parties for exposure to such risk. A key driver CVA is recovery risk, generated by variability rates. In this paper, we develop a framework assess CCR accounting risk arises from introduction stochastic Adopting structural model time default exploits time-changed Lévy process equity value, provide complete picture monitor and gauge effects extracts information on creditworthiness OTC contract combining Fourier Cosine Expansion Monte Carlo simulations methods price CDS spreads, related underlying, retrieve barrier. We apply proposed business case analyzing two involved with underlying energy commodities. Low average rates reveal be associated high implied volatility depart fixed 40%, especially during periods market distress.