Investigation of Methodologies for Counterparty Credit Risk and Credit Value Adjustment Calculation

The research project is to investigate a multi]factor multi]asset extension of the Hestonf93 stochastic volatility model for comprehensive Credit Value Adjustment calculation and Commodity Counterparty Credit Risk methodology. The extended model covers counterparty hazard rates correlated with the underlying and interest rates in order to model wrong]way exposure. The project includes mathematical investigation of the model, parameter calibration methodologies based on the fitting into the observed market option prices, investigation of statistical methods for parameter estimation from the historical data, and prototyping of the effective Monte Carlo simulation methods for computer modeling. The partner organization, RBC Group Risk Management, will benefit from this research project by implementing comprehensive stochastic model for the Counterparty Credit and Credit Value Adjustment calculation including Commodities Counterparty Credit Risk. This will allow for better measurement and management of the Counterparty Credit Risk.

Faculty Supervisor:

Dr .Luis Seco

Student:

Daniel Huber/Weiwei Guo

Partner:

RBC Financial Group

Discipline:

Mathematics

Sector:

Finance, insurance and business

University:

University of Toronto