Modelling Counterparty Credit Risk

Specialeforsvar: Ge Gao

Titel: Modelling Counterparty Credit Risk

Abstract: In this thesis, we investigate how to quantify counterparty risk in the form of CVA as a bank. The Hull-White model is used for modelling the stochastic short rate of interest and the stochastic intensity follows the Cox-Ingersoll-Ross model. The values of the parameters under the Hull-White model are calibrated based on the observed market swap rates. Then, we simulate the discounted expected exposure of a 1Y29Y receiver interest rate swap based on the calibrated Hull-White model with Monte-Carlo simulation. In addition, we calibrate parameters under the CIR model to the observed CDS prices on Apple Inc, and we derive the default probability of Apple Inc. Finally, we calculate the numerical results of CVA with discounted expected exposure and default probability under two cases: with and without correlation between the short rate and the default intensity.
Keywords— CVA, Hull-White model, Cox-Ingersoll-Ross model, interest rate swap, discounted expected exposure, default probability

Vejleder: Rolf Poulsen
Censor:    Kim Christensen, Aarhus Universitet