Not logged in.

Contribution Details

Type Master's Thesis
Scope Learning and pedagogical Research
Title Unilateral CVA/DVA pricing with wrong way risk in the energy market
Organization Unit
Authors
  • Markus Regez
Supervisors
  • Erich Walter Farkas
  • Fulvia Fringuellotti
Language
  • English
Institution University of Zurich
Faculty Faculty of Economics, Business Administration and Information Technology
Number of Pages 97
Date 2015
Abstract Text In this thesis we discuss the wrong way risk of credit value adjustment (CVA) and debit value adjustment (DVA) for energy derivatives. After presenting and calibrating a forward price model for the electricity, oil and coal markets we concentrate on the models proposed by Brigo et al. (2009a), Hull and White (2012) and Rosen and Saunders (2012) which all allow for a dependence of exposures and default probabilities. For each of these models we propose and apply calibration methods using historical CDS spread and energy futures market data. This allows to calculate the CVA of randomly generated portfolios with 9 companies active in the energy market. We nd that the three models generally agree on the answer to the question if a portfolio contains right or wrong way risk and show highly correlated results, but they do not always agree on the exact level. We also nd that right/wrong way risk is less pronounced in the electricity market than in the oil market, which we attribute to lower historical dependence between forward prices and default probabilities of electricity companies than of oil companies, lower volatility observed in the electricity forward market and nally to the special payment terms of electricity forward contracts. Due to the large model risk revealed by these three models, the decision of the Basel Committee to consider wrong way risk using a rather conservative factor seems to be justi able. We additionally nd that both a short and a long call option on the same electricity forward contract with the same counterparty can exhibit right way risk in all of these models, an observation which was not expected by intuition but can again be explained by the payment conditions of electricity forward contracts.
Export BibTeX