Abstract:
This thesis aims to provide an overview of Credit Valuation Adjustment (CVA) in theory and practice. First of all, the historical background is presented in order to better understand the development and the importance of the CVA. The latter one represents in fact the core component of the so called Counterparty Credit Risk which is the loss incurred in the case of the counterparty’s default. For this reason it is important to take into consideration also the regulatory background. After some conceptual explanations, one proceeds into a deep insight and understanding of CVA under a practical point of view. Since there are different methods which can be used, this thesis just focuses on the main Exposure At Default models for Counterparty Credit Risk under Basel frameworks. Indeed a comparison between the preceding approaches and the standardised approach is fully explained. For a better and final comprehension, a practical example is described: it is shown how to compute the fair value of a 5-year zero-coupon corporate bond by using the binomial forward rate tree with a given specific volatility percentage for the 1-year benchmark bond. The analysis concludes with a general and current overview of the CDS market and, in particular, the growth of the role of Central Counterparties..
