Pricing Partners announced today that Price-it library can compute CVA, DVA and bilateral CVA for all payoff based trades.
Credit Value Adjustment (CVA) represents the additional cost to account for the possibility of the counterparty’s default, which is computed as the difference between the risk free market value and the one where the counterparty could default. Debt Valuation Adjustment (DVA) represents the additional cost to account for one’s own default. Bilateral CVA is the combination of the two (CVA and DVA).
CVA/DVA/Bilateral CVA computations become critical for financial markets and introduce more complexity in the valuation space. Although CVA/DVA/ Bilateral CVA computation is about to be standardized for vanilla swap and simple derivatives, the challenge remained unsolved for general derivatives. Thanks to its scripting language that allows scripting virtually any derivatives and its generic American Monte Carlo (AMC) engine, Pricing Partners invents a new powerful solution to compute CVA/DVA/Bilateral CVA for virtually any derivatives with accurate valuation of the potential future exposure and the corresponding probabilities of a default of the counterparty. This leverages its generic AMC engine with reliable estimation of the exercise boundary based on either Longstaff Schwartz algorithm on meaningful regression variables expanded to the order 5 or on the Andersen intrinsic value barrier criterion.
Eric Benhamou, CEO of Pricing Partners, comments: “This new generic CVA engine is awesome. It generates enormous added value for our clients, which enables them to quantify the CVA on their derivatives portfolio, without limits on derivatives payoffs. This innovation should continue to strengthen Pricing Partners’ leading position in risk management for OTC derivatives.”