Counterparty Risk And The Impact Of Collateralization In CDS Contracts
The authors analyze the counterparty risk embedded in CDS contracts, in presence of a bilateral margin agreement. First, they investigate the pricing of collateralized counterparty risk and they derive the bilateral Credit Valuation Adjustment (CVA), Unilateral Credit Valuation Adjustment (UCVA) and Debt Valuation Adjustment (DVA). They propose a model for the collateral by incorporating all related factors such as the thresholds, haircuts and margin period of risk. They derive the dynamics of the bilateral CVA in a general form with related jump martingales. They also introduce the Spread Value Adjustment (SVA) indicating the counterparty risk adjusted spread.