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

A bank has an uncollateralised OTC derivative portfolio with a counterparty. Under the standard unilateral CVA approach, which expression best describes CVA from the bank's perspective?

Unilateral CVA is the expected loss from counterparty default, computed as loss given default times discounted expected positive exposure weighted by marginal default probabilities across time periods. It differs from DVA, which reflects the bank's own default, and from peak exposure, which is a tail measure.

  1. AThe expected loss from counterparty default: loss given default multiplied by the discounted expected positive exposure weighted by the default probability in each periodCorrect
  2. BThe market value of the bank's own default risk on the amount it owes the counterparty
  3. CThe difference between the risk-free value and the collateralised value of the portfolio at inception
  4. DThe peak exposure at the 99th percentile over the life of the portfolio

Explanation

Unilateral CVA is the price of counterparty credit risk: (1 - recovery) times the sum of discounted expected positive exposure times marginal default probability. The own-default option describes DVA, not CVA. Peak exposure is a limit-setting measure, not an expected loss.

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