Skip to content

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

A bank has an uncollateralised derivative portfolio with a corporate client. The bank calculates unilateral CVA from its own perspective. Which statement best describes what unilateral CVA measures?

Unilateral CVA is the expected loss from the counterparty's default, assuming the bank itself cannot default. It is built from expected exposure, the counterparty's default probability and loss given default. The benefit from the bank's own default is DVA, which is excluded here.

  1. AThe expected loss from the counterparty's default, ignoring the bank's own default probabilityCorrect
  2. BThe expected gain to the bank from its own possible default before the counterparty defaults
  3. CThe market value of the collateral the bank must post under the credit support annex
  4. DThe difference between the risk-free and the risky value of the bank's own debt

Explanation

Unilateral CVA treats only the counterparty as defaultable and values the expected loss from its default, using exposure, default probability and loss given default. The second option describes DVA, which arises only when the bank's own default is considered. Collateral value and own debt pricing are unrelated to the definition.

Did you get it right without looking?

One question tells you little. A timed set on Credit Value Adjustment shows your real accuracy, how long you take and where you lose marks.

Practise Credit Value AdjustmentFree diagnostic mock

More Credit Value Adjustment questions