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

A bank has a single 3-period exposure profile to a counterparty with the following expected positive exposures (discounted) and marginal default probabilities: Period 1: EPE 10 million, default probability 2%; Period 2: EPE 14 million, default probability 3%; Period 3: EPE 8 million, default probability 4%. The loss given default is 60%. Ignoring wrong-way risk and assuming independence, what is the unilateral CVA?

Unilateral CVA equals LGD times the sum of discounted EPE multiplied by marginal default probability. That gives 0.6 times 0.94 million, which is 0.564 million.

  1. A1.032 millionCorrect
  2. B0.619 million
  3. C1.720 million
  4. D0.432 million

Explanation

CVA = LGD × Σ(EPE × PD) = 0.6 × (10×0.02 + 14×0.03 + 8×0.04) = 0.6 × (0.20 + 0.42 + 0.32) = 0.6 × 0.94 = 0.564 million. Recomputing: the sum is 0.94, so 0.564 million is the exact value, and option 1 does not match. Corrected answer is 0.564 million.

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