Accurately measuring and managing a portfolio’s counterparty credit risk (CCR) is very challenging, requiring that you accurately capture the stochastic nature of counterparty exposures, as well as the dependency between exposures and counterparty defaults. From a regulatory perspective, the Basel II Accord allows banks to use internal models to compute CCR capital requirements, based on the concepts of expected positive exposure (EPE), and the alpha multiplier. In addition, financial institutions must value their derivatives portfolios incorporating the possibility of losses due to counterparty default. The credit valuation adjustment (CVA) is the market value of this counterparty credit risk.
R² Credit Capital for CCR and CVA provides a powerful solution for computing and allocating CVA, as well as for measuring CCR economic capital. In particular, it provides comprehensive stress testing capabilities, as well as a unique framework to effectively model wrong-way risk.