Course Project: CVACalculation for IRS

Project Objective

Use Spyder running Python 3 to develop code for calculating CVA for an Interest Rate Swap for a counterparty entering into an IRS as a Fixed Pay Receiver.

Project Requirements

Use Spyder running Python 3 to develop the code featuring the following functionality:

•    Read the Run Parameters from the file FNCE5323_23Sm_CVA-IRS-Params.csv which contains the following table:

•    Use the script you developed for Assignment 1 to

o Generate 1000 stochastic scenarios for short term interest rates T (n, ti ),

where n = 1, … , Nmbscens and ti   = dt, 2dt, … , Idt,  I = t term  years) and

calculating prices of zero coupon bonds Z (n, ti,  τj ), for n = 1, … , Nmbscens;

ti   = 0, dt, 2dt, … , Idt,  I = t term t(n) years);    τj  = 1 ∙ dtau, 2 ∙ dtau, … ,J ∙ dtau,  J = tauter years).

•    Apply the script you developed for Assignment 2 to

o Use the zero coupon prices of z(n, ti,  τj)  for calculating IRS Fixed Leg and IRS Floating Leg by applying correspondingly:

Fixed Leg(n, ti) = s ∙ dt ∙ iz(n, ti,  τj) ,

Floating Leg(n, ti) = 1 − z(n, ti, T − ti),

where   T = t term (in years), for all ti    = 0, dt, 2dt, … , Idt,  I  = t term  years).

o For each scenario n = 1, … , Nmb Scens and all ti    = 0, dt, 2dt, … , Idt,  I  = t term  years)

use Fixed Leg(n, ti) and Floating Leg(n, ti) to calculate

IRS MtM Fixed Leg payer(n, ti) = Floating Leg(n, ti) − Fixed Leg(n, ti) or

IRS MtM Fixed Leg Receiver(n, ti) = Fixed Leg(n, ti) − Floating Leg(n, ti) that is specified in the Project Objective.

o For each  ti    = 0, dt, 2dt, … , Idt,  I  = t term  years)   go across all the scenarios to calculate the EE(ti)

and PFEk(ti) for the given PFE confidence level k.

•   Use the script you developed for Assignment 3 to interpolate credit spreads given at the bottom part of the

parameter table for each ti    = 0, dt, 2dt, … , Idt,  I  = t term  years) and then

calculate PD(ti−1, ti) for each ti   =  dt, 2dt, … . , Idt,  I  = t term  years) .

•    Use the formula shown in Deck10_CalculatingCVApdf and in FNCE5323_23Sm_CVA-IRS- Template.xlsm to calculate

o CVA,

o Risky DUTation,  CVA(bPs)Approx 1  and

o EPE,   CVA(bPs)APPTox 2

•    Put the EE(ti) and PFEk(ti), SPTead(ti) and  PD(ti−1, ti),  for all ti    = 0, dt, 2dt, … , Idt,  I = t term  years)

into a .csv output file that should be named as CVA-IRS_YourGroupID_out.csv

For example, Hartford group H3 the file should be named as

CVA-IRS_H3_out.csv

•    Put CVA,  Risky DUTation,  CVA(bPs)Approx 1, EPE,   CVA(bPs)APPTox 2  into

exactly the same output file CVA-IRS_YourGroupID_out.csv

•    Do !!!NOT!!! create any additional files. All your outputs should go into

the same file which should look like FNCE5323_23Sm_CVA-IRS-Out.csv

Project Delivery

•    The project code should be saved as a Python file that can be run in Spyder.

The file should be named CVA-IRS_YourGroupID.py

For example, Hartford group H3 the file should be named as CVA-IRS_H3.py

•    !!!! Only the file with your Python script should be submitted. DO NOT submit your output file.

•   The file should be submitted via Blackboard no later than

11:59 pm,Thursday, July 27, 2023

•   It is expected that for each group the submission is done by the group representative. There should be ONE

and ONLY ONE submission for each group.

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