I don't understand CVA

[wkdwnstjdTprtm]

According to Wikipedia, CVA is defined as the difference between the risk-free portfolio value and the true portfolio value that takes into account the possibility of a counterparty’s default.

What does the 'risk-free portfolio value' mean? I guess it's similar to the risk premium (risky asset return - riskfree asset return), but can anyone provide an example of the risk-free portfolio value in the context of CVA?

 

[Ken Abbott]

According to Wikipedia, CVA is defined as the difference between the risk-free portfolio value and the true portfolio value that takes into account the possibility of a counterparty’s default.

What does the 'risk-free portfolio value' mean? I guess it's similar to the risk premium (risky asset return - riskfree asset return), but can anyone provide an example of the risk-free portfolio value in the context of CVA?

Start with Canabarro and Duffie.

http://www.darrellduffie.com/uploads/surveys/duffiecanabarro2004.pdf

 

[wkdwnstjdTprtm]

Start with Canabarro and Duffie.

http://www.darrellduffie.com/uploads/surveys/duffiecanabarro2004.pdf

Thank you Ken. I actually read it last year, but I forgot most stuff. I will re-read it tomorrow..

 

[Ken Abbott]

Thank you Ken. I actually read it last year, but I forgot most stuff. I will re-read it tomorrow..

It's not up-to-date, but it covers the bases.

Think of it this way:
You have two identical swaps, one with US Treasury and the other with a hedge fund that would be rated CCC, if it could get a rating.

How do you ascribe relative value?