Counterparty Credit Risk and Credit Value Adjustment: A Continuing Challenge for Global Financial Markets, 2nd Edition

12.5 CVA with Collateral

Finally, we will consider the impact of collateral on CVA, which follows from the assessment of the impact of collateral in Section 9.7. As with netting before, the influence of collateral on the standard CVA formula given in equation (12.2) is straightforward. Collateral only changes the EE (it does not change the default probability of the counterparty or recovery value) and hence the same formula may be used with the EE based on assumptions of collateralisation. The base case scenario will consider the four trades used above and described in Section 9.5. The base case exposure, with and without collateral, can be seen in Figure 9.19. This assumes a zero-threshold, two-way CSA with a minimum transfer amount of 100,000 and a rounding of 20,000. For the CVA calculation, a flat credit curve of 500 bps and recovery value of 40% is assumed. The base case CVA without any collateral considered is 257,905 as can be seen, for example, from Table 12.6.

12.5.1 Impact of Margin Period of Risk

We first consider the impact of the margin period of risk on the zero-threshold CVA calculation, as considered previously in Figure 9.21. The CVA increases, from being very small at a margin period of risk of zero²⁴ towards the uncollateralised value as shown in Figure 12.12. At a margin period of risk of 30 calendar days, the CVA is almost half the uncollateralised CVA. This is in line with the more conservative assumption of a minimum of 20 business days required in certain ...