Case Studies

CVA Pricing Analysis for Global Financial Institution

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A global financial institution operating in over 50 countries with over 10 million customers, the client manages a large portfolio of both vanilla and exotic OTC derivatives across multiple currencies and asset classes including credit, interest rates and foreign exchange. The client is also a customer to the street and is charged CVA by dealer banks on derivative transactions.



The client wanted to gain a better understanding of the mechanics of CVA pricing,
especially on transactions involving multiple currencies.



 

The Market 

Credit Valuation Adjustment (CVA) is a complex calculation since it incorporates counterparty default probability into the valuation of derivatives positions. In addition, the CVA of one trade is a function of the entire portfolio due to netting and collateral considerations. Calculation of CVA is mandated by accounting rules and has become more central with the implementation of Basel lll.

Quantifi's Approach

Quantifi specified all market data needed to perform the calculations, which the client provided along with terms and conditions of the transactions. The client also provided a sample of dealer quotes for comparison purposes. Quantifi recommended a set of parameters to use in configuring the Monte Carlo simulation, based on industry best practice and the transaction types. 

 

Business Challenges

The client wanted to gain a better understanding of the mechanics of CVA pricing, especially on transactions involving multiple currencies. The firm's widening credit spread dramatically increased CVA charges levied by dealers. Therefore the client wanted more transparency and a second opinion these CVA charges.

Benefits + Results

Quantifi generated a matrix of CVA prices, expressed as an upfront charge and running basis points, in a matter of days, in time for the the client's internal presentation to senior management. Quantifi also analysed the differences between its results and the dealer quotes, helping the client to better understand CVA pricing dynamics. The client is now able to challenge counterparties on CVA pricing as as more efficient manage credit capital

 

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