Wrong Way Risk: An Introduction
1. Context
In this video from FRM Part 2 curriculum, we introduce this concept of Wrong Way Risk (WWR). A WWR situation is one in which there is a positive dependence between exposure and probability of default or equivalently, a negative dependence between exposure and credit quality (or credit health) of the counterparty. Ignoring this positive dependence may lead to an underestimation of measures such Credit Valuation Adjustment (CVA). For more information about the FRM Part 2 preparation course, please visit the course page.
| Area | Credit Risk |
| Reading | Credit Valuation Adjustment (CVA) |
| Reference | Jon Gregory, Chapter 17. CVA In The xVA Challenge: Counterparty Credit Risk, Funding, Collateral, and Capital, 4th Edition, (West Sussex, UK: John Wiley & Sons, 2020) |