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P2.T6.916. Bilateral credit value adjustment (BCVA) and the debt value adjustment (DVA) (Gregory Ch.14)

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Learning objective: Define and calculate incremental CVA and marginal CVA and explain how to convert CVA into a running spread. Explain the impact of incorporating collateralization into the CVA calculation. Describe debt value adjustment (DVA) and bilateral CVA (BCVA). Calculate BCVA and BCVA spread.

Questions:

916.1. Consider a netting set with two derivative positions: an interest rate swap (IRS) with a marginal CVA of -1.450 and a cross-currency swap (CCS) with a marginal CVA of -1.550. If the first transaction is the cross-currency swap (CCS) and its incremental CVA is -2.100, then what is the incremental CVA of the IRS?

a. -0.900
b. -1.100
c. -1.550
d. -2.220


916.2. Peter approximated the CVA of a collateralized exposure by assuming a 10-day margin period of risk (MRP) and his result is a CVA of -0.20. The uncollateralized CVA would in excess of -1.00; that is, without collateral the CVA would be less than -1.0. Subsequently, he realizes that he was mistaken and the actual MPR is 40 days. If this is the only change (i.e., ceteris paribus), then what is the revised approximation of the credit value adjustment (CVA)?

a. Changed to -0.050
b. Cut in half to -0.10
c. Doubled to -0.40
d. Quadrupled to -0.80


916.3. Each of the following statements about the debt value adjustment (DVA) is true EXCEPT which is false?

a. Bilateral CVA is the sum of the credit value adjustment (CVA) and DVA
b. Compared to the risky value that only incorporates the unilateral CVA term, the insertion of DVA will INCREASE the value of the risky position
c. DVA is the formalization of a term that incorporates specific wrong-way risk (i.e., between exposure and default of counterparty) in the CVA framework
d. Many banks perceive DVA as a funding benefit from a negative exposure (NEE) and perceive there should be an associated funding cost from a positive exposure (EE)

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