Impact Analysis of Wrong-Way Risk in CVA Calculation: A Focus on KRW Interest Rate Swaps
0
조회
0
다운로드
0
인용
0
참고문헌
키워드
초록
This study investigates the impact of Wrong-Way Risk on the calculation of CVA when trading KRW interest rate swaps. Following the global financial crisis, CVA has become a crucial risk metric for managing counterparty credit risk. While WWR-adjusted CVA for uncollateralized swap transactions has already become a market standard in the international swap markets, this concept has yet to be established in the domestic swap market. WWR arises from the positive correlation between the swap dealer’s exposure and the counterparty’s probability of default. This paper finds that the characteristics of WWR can significantly affect the value of CVA. The findings prove that a foundation for the introduction of valuation adjustment along with WWR-adjusted CVA should be laid in the domestic swap market. Furthermore, it emphasizes the need for counterparty risk management to be in line with the global standard in Korea, enabling swap dealers to enhance financial soundness and improve accounting reliability.
Abstract
This study investigates the impact of Wrong-Way Risk on the calculation of CVA when trading KRW interest rate swaps. Following the global financial crisis, CVA has become a crucial risk metric for managing counterparty credit risk. While WWR-adjusted CVA for uncollateralized swap transactions has already become a market standard in the international swap markets, this concept has yet to be established in the domestic swap market. WWR arises from the positive correlation between the swap dealer’s exposure and the counterparty’s probability of default. This paper finds that the characteristics of WWR can significantly affect the value of CVA. The findings prove that a foundation for the introduction of valuation adjustment along with WWR-adjusted CVA should be laid in the domestic swap market. Furthermore, it emphasizes the need for counterparty risk management to be in line with the global standard in Korea, enabling swap dealers to enhance financial soundness and improve accounting reliability.
참고문헌 (14)
- Cherubini, U., "Credit valuation adjustment and wrong way risk", Quantitative Finance Letters, 1(1), pp.9~15 (2013)
- Dossing, M, "The impact of collateral on CVA under general wrong-way risk", pp.2021
- Dupoyet, B., "A new take on the relationship between interest rates and credit spreads", Applied Economics, 56(5), pp.520~536 (2024)
- Fabozzi, F. J., "Interest Rate, Term Structure and Valuation Modelling" (2002), John Wiley & Sons, Inc
- Hull, J., "CVA and Wrong-Way Risk", Financial Analysts Journal, 68(5), pp.58~69 (2012)
- Kim, T., "Estimating and Analyzing KRW Risk Free Rates using Overnight Index Swap", Korean Journal of Financial Engineering, 18(4), pp.139~177 (2019)
- Kim, T., "Valuing Non-Collateralized Swaps with Adjustments", Korean Journal of Financial Engineering, 21(3), pp.1~34 (2022)
- A Generalized Single Common Factor Model of Portfolio Credit Risk, "Kupiec, P. H.", FDIC Center for Financial Research, ~ (2007)
- Portfolio Credit Risk: Introduction, "Navas, G.", Numerical Algorithms Group, ~ (2016)
- Taarit, M. I., "Pricing of XVA adjustments : from expected exposures to wrong-way risks", pp.2018
- Tulegenov, K., "Credit Valuation Adjustment Wrong Way Risk: Comparison of Hull-White’s Wrong Way Risk Model with the Ruiz et al.’s Model", pp.2018