Counterparty Credit Risk for OTC products and Credit Value Adjustment.

Abstract

This thesis has the object to give a general overview of the Credit and Counterparty Risk and to evaluate how the factors linked to this risk influence the price of the OTC products. CCR comes from the probability at default of an institute that could potentially cause losses to its own creditors. The fundamental concept that is linked to this value of risk is called Exposure, concept that will be carefully presented and computed to a set of OTC products. There exist several measures that allow to quantify the amount of credit exposure during the life of a product. Measures as Expected Exposure, Potential Future Exposure or Expected Positive Exposure are auxiliary to the definition of the fundamental measure Credit Value Adjustment (CVA). This metric define the true value of a risky product, as it is computed as the difference between the risk free value of a contract and its real value taking into consideration the probability at default of the counterparty. The last part of the thesis is dedicated to the computation of the Exposure and the CVA for European Options making use of the Internal Method Model (IMM) elaborate by one of the biggest bank institute.