Abstract:The use of CVA to cover credit risk is widely spread, but has its limitations. Namely, dealers face the problem of the illiquidity of instruments used for hedging it, hence forced to warehouse credit risk. As a result, dealers tend to offer a limited OTC derivatives market to highly risky counterparties. Consequently, those highly risky entities rarely have access to hedging services precisely when they need them most.In this paper we propose a method to overcome this limitation. We propose to extend the CVA r… Show more
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