Hi all!We are two students currently working on our masters thesis on Basel III CVA risk capital charge. We are currently a little stuck on the advanced method for CVA risk capital charge. We are able to calculate CVA according to paragraph 98, page 31 in "Basel III A global regulatory framework for more resilient banks.." On the following page, paragraph 99 it states that this is supposed to be the input to "the banks approved VaR model for bonds", and that this gives the capital charge for CVA advanced method. So our question is simply how this works? We have found a description of "the equivalent bond approach" in this document: http://www.bis.org/bcbs/qis/qiscompinstr.pdf . Where on page 69 it says: "Both charges are calculated by inserting the PV of the bond equivalents(e^{-sM}-1)*EAD*e^{-rM}into the bank?s approved VaR model."Is this what we are supposed to do VaR on? If so how does the CVA calculated as in paragraph 98 in Basel III come into this formula?Thanks!

The formula you have there looks like the one period version of the calculation from Basel III, with LGD of 100%. I haven't had time to go through the QIS paper you posted the linked to, but the correct formula to calculate CVA VaR on is the one from the accord. You stress the spreads on that formula and the LGD values across all your VaR scenarios, then take the relevant percentile pnl to get your CVA VaR. If you want the CVA VaR including hedges you calculate the pnl of the portfolio of the CVA (treat each CVA amount as a bond) and the relevant hedges (revalued under stressed spreads and LGD).