Market and Counterparty Credit Risk : Selected Computational and Managerial Aspects

Schwake, Daniel

The thesis can be placed within the literature on market and counterparty credit risk, contributing along the following three dimensions: 1. Interest rate risk (IRR) management: The thesis starts with an overview on asset liability management (ALM) in general and IRR management in particular. It then gives a novel procedure for structuring swap overlays for pensions funds, allowing for optimal hedging of IRR without affecting the strategic asset allocation (SAA). The thesis also offers an extension of the analysis of the Cairns (2004) stochastic interest rate model Deriving respective model-based sensitivity measures (Cairns deltas). It finally applies the model to a practical application, analyzing it when it comes to long-term contracts. 2. Pricing and managing counterparty credit risk A compact overview on counterparty credit risk (CCR) and credit valuation adjustment (CVA) is given. This is followed by a unique analyses around valuation, relevant accounting and regulatory requirements as well as pricing and mitigation, esp. Illustration of how CVA capital charge shows the tautology behind the discussions around regulatory requirements. The thesis contributes also to the discourse on debt valuation adjustment (DVA), e.g. showing that some aspects are not that unintuitive as presumed (e.g. DVA is being priced). 3. CVA modeling and wrong way risk. The thesis gives an overview on credit risk modeling in general and credit spreads in particular. It especially revisits the CVA for CDS model introduced by Brigo and Capponi (2010), giving e.g. A) a step-by-step implementation guide, esp. w.r.t to parts Brigo and Capponi (2010) left open; B) a computational tune-up, incl. a demonstration of its robustness across a variety of scenarios, and a realistic case study; C) a novel analysis of the Brigo & Capponi (2010) model in particular and CVA modeling in general

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Schwake, Daniel: Market and Counterparty Credit Risk. Selected Computational and Managerial Aspects. 2016.

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