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Reading References for Derivatives Counterparty Credit Risk and XVA

Article Quant Q&A · Author: Max
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Summary

The document collects suggested reading for an internship in model risk management focused on counterparty credit risk, especially exposure from derivatives. Its references cover modeling, pricing, and hedging counterparty exposure; credit valuation adjustment and related funding, collateral, and capital adjustments; and broader XVA desk practice. It also includes research on dependence between defaults and asymmetric counterparty relationships.

One answer recommends beginning with an introductory guide to counterparty credit risk, then studying least-squares Monte Carlo methods used to value American options and, in some banks, exotic derivatives for counterparty calculations. It also points to a paper on model risk as relevant preparation for model risk work. The material is a bibliography with brief orientation rather than a tutorial or evaluation of the cited methods. The suggested path is explicitly dependent on the intern's assigned work, and the document does not compare the references or establish that a particular technique is used at every institution.

Key ideas

  • The references cover derivatives exposure modeling, pricing, and hedging.
  • Several books address CVA and related funding, collateral, and capital adjustments.
  • Default dependence and asymmetric counterparty relationships are represented in the suggested research papers.
  • Least-squares Monte Carlo is cited as a technique used for valuing some derivatives in counterparty calculations.
  • The best reading sequence depends on the tasks assigned in the internship.

Tags

Derivatives pricingRisk managementOptionsFixed income
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# References for Counterparty Credit Risk, especially derivatives exposure


# References for Counterparty Credit Risk, especially derivatives exposure












I fortunately landed an internship in Model Risk Management in one of the largest European Banks and now am looking for good references for Counterparty Credit Risk, especially derivatives exposure, since there doesn't seem to be a lot of literature.

Thanks in advance!

## Answer by Dimitri Vulis (score 4, accepted)

https://quant.stackexchange.com/a/58054

Giovanni Cesari, John Aquilina, Niels Charpillon, Zlatko Filipovic, Gordon Lee, Ion Manda. Modelling, Pricing, and Hedging Counterparty Credit Exposure: A Technical Guide (2009)

Eduardo Canabarro. Counterparty Credit Risk (2010)

Chris Kenyon, Roland Stamm. Discounting, Libor, CVA and Funding: Interest Rate and Credit Pricing (2012)

Damiano Brigo, Massimo Morini, Andrea Pallavicini. Counterparty Credit Risk, Collateral and Funding: With Pricing Cases for All Asset Classes (2013)

Roland Lichters, Roland Stamm, Donal Gallagher. Modern Derivatives Pricing and Credit Exposure Analysis: Theory and Practice of CSA and XVA Pricing, Exposure Simulation and Backtesting (2015)

Ignacio Ruiz. XVA Desks - A New Era for Risk Management: Understanding, Building and Managing Counterparty, Funding and Capital Risk (2015)

Jon Gregory. The xVA Challenge: Counterparty Credit Risk, Funding, Collateral, and Capital. Wiley (2015)

Andrew Green. XVA: Credit, Funding and Capital Valuation Adjustments (2015)

Dongsheng Lu. The XVA of Financial Derivatives: CVA, DVA and FVA Explained (2015)

## Answer by stans (score 2)

https://quant.stackexchange.com/a/76428

Schönbucher, P., & Schubert, D. (2001). Copula-Dependent Defaults in Intensity Models. Working Paper, Bonn University.

Terentyev, S. (2004). Asymmetric counterparty relations in default modeling. Technical Report. Stanford University. (pdf)

## Answer by Daneel Olivaw (score 1)

https://quant.stackexchange.com/a/51187

I strongly recommend starting with this:

> Zhu, Steven and Pykhtin, Michael (2008). ”A Guide to Modeling Counterparty Credit Risk”, GARP Risk Review

This should introduce you to all necessary concepts you might encounter in a counterparty-related internship. Then you might want to read the following:

> Longstaff, Francis and Schwartz, Eduardo (2001). “Valuing American Options by Simulation: A Simple Least-Squares Approach”, The Review of Financial Studies, Vol. 14, No. 1, pp. 113-147

In many banks, exotic derivatives are valued using Longstaff-Schwartz techniques for the purpose of counterparty-related calculations because of its efficiency, simplicity and good performance. This might also be the case in your place.

After that, I guess additional reading is up to you and the kind of tasks you are exposed to during your internship.

Finally, considering you mention you will be working in model risk, I also recommend the following paper:

> Derman, Emanuel (1996). “Model Risk”, Quantitative Strategies Research Notes, Goldman Sachs

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.