How To calculate CVA With “Wrong Way Risk”

In the area of counterparty credit risk “Wrong Way Risk” is a hot topic. It is required by Basel III and there are lively debates in various trade forums about the right approach. The discussion today is, however, still very academic and
therefore of limited practical use.

So what exactly is “Wrong way risk”? According to ISDA “Wrong way risk occurs when exposure to a counterparty is adversely correlated with the credit quality of that counterparty. Wrong way risk, as an additional source

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