Impact Analysis of Wrong-Way Risk in CVA Calculation: A Focus on KRW Interest Rate Swaps

This study investigates the impact of Wrong-Way Risk on the calculation of CVA when trading KRW interest rate swaps. Following the global financial crisis, CVA has become a crucial risk metric for managing counterparty credit risk. While WWR-adjusted CVA for uncollateralized swap transactions has already become a market standard in the international swap markets, this concept has yet to be established in the domestic swap market. WWR arises from the positive correlation between the swap dealer’s exposure and the counterparty’s probability of default. This paper finds that the characteristics of WWR can significantly affect the value of CVA. The findings prove that a foundation for the introduction of valuation adjustment along with WWR-adjusted CVA should be laid in the domestic swap market. Furthermore, it emphasizes the need for counterparty risk management to be in line with the global standard in Korea, enabling swap dealers to enhance financial soundness and improve accounting reliability.