Class CvaApproximator

java.lang.Object

com.quantfinlib.credit.CvaApproximator

public final class CvaApproximator
extends Object

UNILATERAL CVA — the price of the counterparty in every derivative you hold: the expected loss from their default before your trades' cash flows finish arriving. The standard discrete approximation the desks carry:

   CVA = LGD * sum_i EE(t_i) * [ Q(t_{i-1}) - Q(t_i) ] * DF(t_i)
 

expected exposure at each bucket, times the probability of defaulting IN that bucket (read off the CreditCurve's survival function), times the discount factor, times loss-given-default. The three ingredients are deliberately separate objects: EXPOSURE comes from your pricing/ simulation stack (this class does not know your portfolio — feed it CounterpartyExposureTracker peaks, a swap's expected-exposure hump, or Monte Carlo EE averages), CREDIT comes from the CDS-bootstrapped curve, DISCOUNT from the YieldCurve.

Approximations, stated: exposure is evaluated at the bucket END and assumed constant across the bucket (O(dt) bias, shrink the grid to shrink it); default and exposure are INDEPENDENT — no wrong-way risk, which UNDERSTATES CVA when exposure grows exactly when the counterparty weakens (the FX-forward-with-an-EM-sovereign classic); unilateral — your own default (DVA) is not netted; LGD is a constant you pass, usually 1 - recovery on the same convention as the curve's bootstrap, but kept separate because the curve's recovery is a quoting convention while CVA's LGD is a modeling choice. Research lane, deterministic.

Method Summary

Modifier and Type	Method	Description
static double	cva(double[] expectedExposure, double[] bucketEndYears, CreditCurve counterparty, YieldCurve discount, double lgd)	Discrete unilateral CVA over the given exposure profile.

Methods inherited from class java.lang.Object

clone, equals, finalize, getClass, hashCode, notify, notifyAll, toString, wait, wait, wait

Method Details

cva

public static double cva(double[] expectedExposure,
 double[] bucketEndYears,
 CreditCurve counterparty,
 YieldCurve discount,
 double lgd)

Discrete unilateral CVA over the given exposure profile.

Parameters:

expectedExposure - EE(t_i) per bucket, ≥ 0 (same currency units as the answer)

bucketEndYears - bucket end times t_i in years, strictly ascending, all > 0; t_0 = 0 is implicit

counterparty - the counterparty's bootstrapped credit curve

discount - risk-free discounting curve

lgd - loss given default in (0, 1]

Returns:

the CVA charge (positive; subtract it from the risk-free PV)