Bridge over ocean
1 September 2012 Financial Analysts Journal Volume 68, Issue 5

CVA and Wrong-Way Risk

  1. John Hull
  2. Alan White

The authors propose a simple model for incorporating wrong-way and right-way risk into the Monte Carlo simulation that is used to calculate credit value adjustment (CVA). The model assumes a relationship between the hazard rate of a counterparty and variables whose values are generated, or can be generated, as part of the Monte Carlo simulation. The authors present numerical results for portfolios of 25 instruments dependent on five underlying market variables.

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