Abstract

VAN VUUREN, Gary  and  ESTERHUYSEN, Ja'nel. A primer on counterparty valuation adjustments in South Africa. S. Afr. j. econ. manag. sci. [online]. 2014, vol.17, n.5, pp.584-600. ISSN 2222-3436.

Counterparty valuation adjustment (CVA) risk accounts for losses due to the deterioration in credit quality of derivative counterparties with large credit spreads. Of the losses attributed to counterparty credit risk incurred during the financial crisis of 2008-9 were due to CVA risk; the remaining third were due to actual defaults. Regulatory authorities have acknowledged and included this risk in the new Basel III rules. The capital implications of CVA risk in the South African milieu are explored, as well as the sensitivity of CVA risk components to market variables. Proposed methodologies for calculating changes in CVA are found to be unstable and unreliable at high average spread levels.

Keywords : counterparty credit risk; CVA; credit ratings; Basel III.

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