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

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18.3 CVA Charging

A key aspect of the transfer pricing of CVA is that there must be a robust and industrialised process in place for calculation of CVA charges in real time. For example, OTC derivatives contracts with clients, such as corporates, can potentially constitute good business for banks, but only if the correct CVA can be priced into the trade at inception. Whilst for large, and/or complex, transactions it may be reasonable to have some delay in assessing the relevant CVA charge, in most cases the calculation will need to be capable of being achieved quickly and without the intervention of the CVA desk. To do this properly is complex from a systems point of view and simple methods are often used by necessity. Banks tend to provide pricing tools for trading, sales and marketing but these have varying levels of sophistication.

18.3.1 Lookup Tables

A lookup table will provide a rapid estimation of a credit charge or CVA based on grids, which may be produced separately for each product type. For example, an interest rate desk may have a grid giving CVA charges as a function of maturity and credit quality (assessed by either counterparty rating or credit spread). Such calculations cannot, of course, account for trade specifics such as payment frequencies and currencies and, for this reason, the charges may be conservative in many cases (for example, an interest rate swap receiving quarterly fixed and paying 6-month LIBOR is unlikely to obtain the relatively small CVA charge ...

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