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

A bank trades a derivative portfolio with a central counterparty and must post initial margin over the life of the trades. It wants to price the expected cost of funding that future initial margin into new trades. Which statement about this adjustment (MVA) is most accurate?

MVA depends on the projected future initial margin profile, which must be simulated using the margin model, such as a VaR-based approach, and then multiplied by the funding spread. Today's margin alone is insufficient because initial margin changes as the portfolio's risk and maturity evolve.

  1. AIt depends on the projected future initial margin profile, which requires simulating future initial margin, typically under a VaR-type margin model, and the funding spread applied to itCorrect
  2. BIt can be computed from today's initial margin alone because margin is constant over the life of trades
  3. CIt is zero whenever variation margin is exchanged daily
  4. DIt equals the CVA multiplied by the funding spread

Explanation

MVA is the cost of funding initial margin through time, so it needs the expected future initial margin profile, which changes as portfolio risk and maturity change, multiplied by the funding spread and discounted. Daily variation margin does not remove initial margin. MVA is not a function of CVA.

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