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Counterparty Risk in FX Forwards

This document shows a calculation of counterparty risk and expected loss (CVA) for an FX forward contract over time. It provides the exposure, cumulative default probability (CDP), and marginal default probability (MDP) at intervals of 0.1 years out to 5 years. The CDP and exposure increase over time, while the MDP decreases, showing that most of the expected loss occurs earlier in the contract term rather than later. A simple approximation of the expected loss is 0.5% compared to the actual calculation of 0.77%.

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7 views3 pages

Counterparty Risk in FX Forwards

This document shows a calculation of counterparty risk and expected loss (CVA) for an FX forward contract over time. It provides the exposure, cumulative default probability (CDP), and marginal default probability (MDP) at intervals of 0.1 years out to 5 years. The CDP and exposure increase over time, while the MDP decreases, showing that most of the expected loss occurs earlier in the contract term rather than later. A simple approximation of the expected loss is 0.5% compared to the actual calculation of 0.77%.

Uploaded by

walter
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd

Counterparty Risk for an FX Forward

Simple illustration of crude expected loss or CVA calculation for an forward contract type exposure where term structure is
very important

Parameters Calculation
Exposure CDP MDP Simple approximation 0.50
0.0 0.00 0.00% Actual result 0.77
0.1 1.41 0.07% 0.07%
0.2 2.00 0.14% 0.07% Exposure CDP
0.3 2.45 0.21% 0.07% 12
0.4 2.83 0.28% 0.07%
10
0.5 3.16 0.35% 0.07%
0.6 3.46 0.42% 0.07% 8
0.7 3.74 0.49% 0.07%
Exposure

0.8 4.00 0.56% 0.07% 6


0.9 4.24 0.63% 0.07%
4
1.0 4.47 0.70% 0.07%
1.1 4.69 0.84% 0.14% 2
1.2 4.90 0.98% 0.14%
1.3 5.10 1.12% 0.14% 0
1.4 5.29 1.26% 0.14% 0 1 2 3 4
1.5 5.48 1.39% 0.14% Time (years)
1.6 5.66 1.53% 0.14%
1.7 5.83 1.67% 0.14%
1.8 6.00 1.81% 0.14%
1.9 6.16 1.95% 0.14%
2.0 6.32 2.09% 0.14%
2.1 6.48 2.29% 0.21%
2.2 6.63 2.50% 0.21%
2.3 6.78 2.70% 0.21%
2.4 6.93 2.91% 0.20%
2.5 7.07 3.11% 0.20%
2.6 7.21 3.32% 0.20%
2.7 7.35 3.52% 0.20%
2.8 7.48 3.72% 0.20%
2.9 7.62 3.92% 0.20%
3.0 7.75 4.13% 0.20%
3.1 7.87 4.40% 0.27%
3.2 8.00 4.66% 0.27%
3.3 8.12 4.93% 0.27%
3.4 8.25 5.20% 0.27%
3.5 8.37 5.46% 0.27%
3.6 8.49 5.73% 0.27%
3.7 8.60 5.99% 0.26%
3.8 8.72 6.26% 0.26%
3.9 8.83 6.52% 0.26%
4.0 8.94 6.78% 0.26%
4.1 9.06 7.11% 0.33%
4.2 9.17 7.44% 0.33%
4.3 9.27 7.76% 0.32%
4.4 9.38 8.08% 0.32%
4.5 9.49 8.41% 0.32%
4.6 9.59 8.73% 0.32%
4.7 9.70 9.05% 0.32%
4.8 9.80 9.37% 0.32%
4.9 9.90 9.68% 0.32%
5.0 10.00 10.00% 0.32%
ard © Jon Gregory
[Link]
re where term structure is

e CDP
12%

10%
Default Probability

8%

6%

4%

2%

0%
3 4 5
years)

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