CVA desks arm themselves for the next crisis
March’s volatility forces dealers to fine-tune hedging strategies
April is said to be the cruellest month. But for one European bank’s credit valuation adjustment desk, the pain came a month earlier.
The bank had entered into a series of interest rate swaps and foreign exchange derivatives with a group of South American oil companies. The trades moved firmly in the bank’s favour after central banks cut policy rates in March, but the subsequent collapse in oil prices caused the credit risk of its counterparties to spike.
The result was a double whammy. As its
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