Up until the global financial crisis of 2008, the aspect of counterparty credit risk in financial contracts had often been overlooked. This were especially true for trades requiring collateral. Systemically important counterparties with higher credit ratings were considered to be risk-free and too big to fail. However, in the wake of the financial crisis it is now praxis to take the counterparty credit risk in account when valuing over-the counter (OTC) derivatives. This valuation adjustment is known as credit value adjustment (CVA).
CVA - Lessons and Outcomes from the Financial Credit Crisis
This article will focus on explaining what CVA is as well as regulatory measures regarding CVA. In later parts of this series, we will describe and evaluate different methods for modelling CVA.