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FRM Part II · FRM Exam Part II · Basel III: Finalising Post-crisis Reforms

A bank uses the reduced version of BA-CVA with no recognised hedges. Under this approach, the capital requirement is driven by which of the following?

Reduced BA-CVA builds a stand-alone charge for each counterparty from exposure at default, effective maturity, a supervisory sector and credit-quality risk weight, and a discount factor, then aggregates them using a 50% systematic correlation. It does not use sensitivities or expected shortfall.

  1. ACounterparty exposure at default, effective maturity, supervisory risk weights by sector and credit quality, and discount factor, aggregated with a systematic correlation of 50%Correct
  2. BSensitivities to delta and vega risk factors under a sensitivities-based method
  3. CTen-day 99% expected shortfall calibrated to stress periods
  4. DThe accounting CVA reserve multiplied by a fixed 12.5 factor

Explanation

Reduced BA-CVA sums counterparty stand-alone CVA charges built from supervisory risk weights, EAD, effective maturity and a discount factor, then aggregates them with a supervisory correlation of 50% between counterparties' systematic components. Sensitivity-based and ES methods belong to SA-CVA or the market risk framework. The accounting reserve is not the basis.

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