Abstract
As was already pointed out by the Basel Committee in its explanatory statements for the new Basel III regulations, counterparty credit risk resulting from migrations rather than defaults accounted for more than two-thirds of losses during the credit crunch of 2007–2008. Since then, the market practice of pricing over-the-counter derivatives has changed dramatically, forcing the industry to include credit valuation adjustments (CVAs) as an essential pricing component. In our chapter, we will provide the mathematical foundations for measuring (unilateral as well as bilateral) CVAs and discuss open problems in efficiently calculating CVAs as well as capturing wrong way risks. Finally, we will also discuss aspects of model risks occurring in CVA calculations.
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