Understanding and managing counterparty risk and CVA (credit value adjustment) has become a key problem for all financial institutions.

The first edition of this book has become a standard reference on the subject of counterparty credit risk. This second edition has been completely re-written to cover the recent extensive changes in theory, market practice and regulation and the new topics of risk-free valuation, funding considerations and Basel III capital requirements.  The basics of counterparty risk management, including aspects such as potential future exposure, netting and collateral, are defined.

Wrong-way counterparty risks in relation to interest rate, foreign exchange, commodity and credit derivative products and regulatory capital for counterparty risk, including the recent Basel III requirements for CVA VAR are discussed. Also considered at length are the implications of an institution valuing their own default via debt value adjustment (DVA) and funding costs (FVA).

The management of counterparty risk within an institution by a CVA desk is reviewed with the associated portfolio management and hedging of CVA described in full.

Finally, the design and benefits of central clearing, a recent development to attempt to control the rapid growth of counterparty risk, is explained.

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