In this article we derive the shareholder loss due to a capital requirement associated to a derivatives transaction. This is a result of a transfer of wealth between shareholders and creditors of the firm. The charge required to negate this loss can be regarded as a capital valuation adjustment...

In this article we derive a capital valuation adjustment for derivatives transactions due to market incompleteness. This is motivated by the fact that a return on equity (RoE) in excess of the riskless rate is the result of undiversifiable portfolio risk.The valuation adjustment represents the...

In this article we introduce a new framework for counterparty risk model backtesting based on Bayesian methods. This provides a conceptually sound approach for analyzing model performance which is also straightforward to implement. We show that our methodology provides important advantages over...

In this article we quantify the loss a financial institution can expect due to central counterparty (CCP) membership. Such a loss can be incurred whenever the CCP has insufficient funds to unwind the portfolio of a defaulting clearing member. This does not necessarily require the default of the...

We introduce a simple model for the credit exposure to leveraged and collateralized counter-parties. Wrong-way risk is captured by linking the counter-party default probability directly to changes in the portfolio value. This applies e.g. to leveraged firms such as hedge funds where large...