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

A bank negotiates a new CSA with a counterparty and wants to reduce CVA without changing trade terms. Which change is most effective at reducing CVA, all else equal?

Lowering the threshold to zero most effectively reduces CVA, since collateral is then required against all exposure and less remains uncollateralised. A bigger minimum transfer amount, less frequent calls, or own-share collateral would raise exposure or add wrong-way risk.

  1. ALower the threshold from USD 10 million to zeroCorrect
  2. BRaise the minimum transfer amount from USD 0.1 million to USD 2 million
  3. CMove from daily to monthly margin calls
  4. DAllow the counterparty to post its own shares as collateral

Explanation

A zero threshold means collateral is called for any exposure, shrinking uncollateralised exposure. A larger minimum transfer amount and less frequent calls both increase exposure. Posting the counterparty's own shares creates wrong-way risk because collateral value falls as default risk rises.

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