Counterparty Risk FAQ: Credit VaR, PFE, CVA, DVA, Closeout, Netting, Collateral, Re-hypothecation, WWR, Basel, Funding, CCDS and Margin Lending

TL;DR

This paper provides a comprehensive dialogue-based overview of counterparty credit risk concepts, models, and regulatory considerations, covering practical and theoretical aspects relevant to financial risk management.

Contribution

It offers an accessible, expert-level Q&A that synthesizes key counterparty risk topics, integrating recent regulatory frameworks and advanced modeling techniques.

Findings

Clarifies complex counterparty risk measures and models.

Highlights regulatory impacts on risk management practices.

Discusses innovative approaches like CVA restructuring through margin lending.

Abstract

We present a dialogue on Counterparty Credit Risk touching on Credit Value at Risk (Credit VaR), Potential Future Exposure (PFE), Expected Exposure (EE), Expected Positive Exposure (EPE), Credit Valuation Adjustment (CVA), Debit Valuation Adjustment (DVA), DVA Hedging, Closeout conventions, Netting clauses, Collateral modeling, Gap Risk, Re-hypothecation, Wrong Way Risk, Basel III, inclusion of Funding costs, First to Default risk, Contingent Credit Default Swaps (CCDS) and CVA restructuring possibilities through margin lending. The dialogue is in the form of a Q&A between a CVA expert and a newly hired colleague.