Joint work with Michael Pykhtin, Federal Reserve Bank

We address the problem of allocating the counterparty-level credit value adjustment (CVA) to the individual trades composing the portfolio. We show that this problem can be reduced to calculating contributions of the trades to the counterparty-level expected exposure (EE) conditional on the counterparty's default. We propose a methodology for calculating conditional EE contributions for both collateralized and non-collateralized counterparties. Calculation of EE contributions can be easily incorporated into exposure simulation processes, which already exist in a financial institution. We also derive closed-form expressions for EE contributions under the assumption that trade values are normally distributed. Analytical results are obtained for the case when the trade values and the counterparty's credit quality are independent as well as when there is a dependence between them (wrong-way risk).

Dan Rosen (bio) Dr. Dan Rosen is the CEO and co-founder of R2 Financial Technologies and acts as an advisor to institutions in Europe, North America, and Latin America on derivatives valuation, risk management, economic and regulatory capital. In addition, he is a visiting fellow at the Fields Institute for Research in Mathematical Sciences and an adjunct professor at the University of Toronto's Masters program in Mathematical Finance.

Dr. Rosen lectures extensively around the world on financial engineering, enterprise risk and capital management, credit risk and market risk. He has authored numerous papers on quantitative methods in risk management, applied mathematics, operations research, and has coauthored two books and various chapters in risk management books (including two chapters of PRMIA's Professional Risk Manger Handbook). In addition, Dr. Rosen is a member of the Industrial Advisory Boards of the Fields Institute and the Center for Advanced Financial Studies at the University of Waterloo, the Academic Advisory Board of Fitch, the Advisory Board, Educational and Credit Risk Steering Committees of the IAFE (International Association of Financial Engineers), the regional director in Toronto of PRMIA (Professional Risk Management International Association), and a member of the Oliver Wyman Institute. He is also one of the founders of RiskLab, an international network of research centers in Financial Engineering and Risk Management, initiated at the University of Toronto. Up to July 2005, Dr. Rosen had a successful ten-year career at Algorithmics Inc., where he held senior management roles in strategy and business development, research and financial engineering, and product marketing. In these roles, he was responsible for setting the strategic direction of its solutions, new initiatives and strategic alliances, as well as heading up the design and positioning of credit risk and capital management solutions, market risk management tools, operational risk, and advanced simulation and optimization techniques, as well as their application to several industrial settings. He holds an M.A.Sc. and Ph.D. in Chemical Engineering from the University of Toronto.