Skip to content

FRM Part II · FRM Exam Part II · Counterparty Risk and Beyond

A bank argues that FVA should not be charged to clients because it double counts the DVA benefit it already recognises. Which statement best captures the overlap debate between DVA and the funding benefit (FDA)?

The overlap arises because the bank's own credit spread drives both DVA and the funding benefit on negative exposure. Both represent the same economic gain from the bank's own default risk, so recognising both fully would double count that benefit.

  1. AThe bank's own credit spread drives both DVA and the funding benefit on negative exposure, so recognising both risks double counting the same economic effectCorrect
  2. BDVA depends only on the counterparty's credit spread, so there is never any overlap with funding
  3. CFVA is unrelated to the bank's own credit spread, so overlap is impossible
  4. DOverlap arises only for collateralised trades with zero threshold

Explanation

Both DVA and the funding benefit on negative exposure arise from the bank's own default risk and spread: the bank gains by not repaying in default, or equivalently by funding cheaply from the counterparty. Counting both for the same cash flows double counts. The other options misstate the drivers of DVA and FVA.

Did you get it right without looking?

One question tells you little. A timed set on Counterparty Risk and Beyond shows your real accuracy, how long you take and where you lose marks.

Practise Counterparty Risk and BeyondFree diagnostic mock

More Counterparty Risk and Beyond questions