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

A bank's desk computes a unilateral CVA of 2.0 million and a DVA of 0.5 million on a netting set. Funding costs on uncollateralised exposure are 0.8 million and funding benefits are 0.3 million. Some practitioners argue that part of the funding benefit duplicates DVA. If the bank avoids double counting by excluding the funding benefit entirely but keeps the funding cost and DVA, what is the total adjustment to the risk-free value (as a net deduction)?

The net deduction is 2.3 million. CVA of 2.0 plus funding cost of 0.8 gives 2.8, then DVA of 0.5 is credited, while the funding benefit of 0.3 is excluded to avoid double counting with DVA. Net equals 2.3 million.

  1. A2.3 millionCorrect
  2. B2.8 million
  3. C2.0 million
  4. D3.1 million

Explanation

Deductions: CVA 2.0 + funding cost 0.8 = 2.8; benefit DVA 0.5 is added back; funding benefit excluded. Net = 2.8 - 0.5 = 2.3 million. Including both benefits gives 2.0, ignoring DVA gives 2.8, and adding all costs gives 3.1.

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