  Wrong-way risk in counterparty and funding exposures is most dramatic in the
situations of systemic crises and tails events. A consistent model of wrong-way
risk (WWR) is developed here with the probability-weighted addition of tail
events to the calculation of credit valuation and funding valuation adjustments
(CVA and FVA). This new practical model quantifies the tail risks in the
pricing of CVA and FVA of derivatives and does not rely on a limited concept of
linear correlation frequently used in many models. The application of the model
is illustrated with practical examples of WWR arising in the case of a
sovereign default for the most common interest-rate and foreign exchange
derivatives.
