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

18.6 Summary

This chapter has considered the management of counterparty risk within a financial institution. We have outlined the important components to consider and the likely role and responsibilities of a CVA desk. CVA pricing and related technology considerations have been discussed. The operation of a CVA desk between the extremes of an insurance company (actuarial approach) and a trading desk (market approach) have been given careful consideration. We have explained that, whilst not hedging CVA at all may be naïve, the attempt to hedge actively may be dangerous also. The greatest challenge of a CVA desk is to know when to hedge and when not to.

Notes

1. The term “CVA desk” has originated because of many banks pricing and managing counterparty risk through a front-office trading desk. Whilst we note that this is not always the case (for example, CVA may be handled within the risk management function), this term will be used throughout this chapter.

2. By CVA, we also mean DVA where relevant. The use of DVA is discussed in more detail later in this chapter.

3. Assuming a running premium would be correctly marked-to-market and not treated on an accrual basis by the trading desk.

4. We note that, as discussed in Section 13.3.3, DVA may provide a benefit at this point.

5. For example, if one trade has a positive value of 100 and another a negative value of 60 then both can be terminated and replaced at an overall cost of 40. The CVA desk will therefore compensate for this net ...