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FRM Part II · FRM Exam Part II · Credit Value Adjustment

A bank has a single-period unilateral CVA of USD 0.60 million on a netted portfolio with no collateral. A new CSA introduces daily variation margin with zero threshold and a 10-day margin period of risk. Holding other inputs constant, which is the most accurate effect on CVA?

CVA falls materially because with daily zero-threshold margining the remaining exposure is only the value change during the 10-day margin period of risk, which shrinks expected positive exposure. It does not reach zero since that residual gap remains. Collateral reduces exposure, not just recovery.

  1. ACVA falls materially because exposure is limited to the movement in portfolio value over the margin period of risk, but does not become zeroCorrect
  2. BCVA becomes exactly zero because collateral eliminates all exposure
  3. CCVA rises because margin increases the bank's funding costs in the CVA formula
  4. DCVA is unchanged because collateral affects only recovery rate

Explanation

With variation margin the residual exposure is the potential change in value during the margin period of risk, plus any disputes or operational delay. This lowers EPE and so CVA, but not to zero. Funding cost is a separate adjustment (FVA/MVA), not part of CVA.

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