Monte Carlo Methods for Risk Management: CVA and the Merton Model in Python

Andrea Chello
The Quant Journey
Published in
8 min readMay 16, 2022

1. Exposure to Default and CVA

Credit Valuation Adjustment, or exposure, is what, at any time t, you are at risk of losing, if the counterparty were to default.

It is the higher of the value of the portfolio and 0, i.e.

  • If your portfolio has a negative value