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

A dealer is comparing bilateral uncollateralised exposure with exposure under a two-way CSA with zero threshold. Which of the following best describes the main residual risk that CVA for the collateralised portfolio still captures?

The residual risk is exposure that can build up between the last successful margin call and the close-out and replacement of trades after default, known as the margin period of risk. Collateral reduces but does not eliminate exposure, because market values can still move during this period.

  1. AExposure that can arise between the last successful margin call and the close-out and replacement of trades after a counterparty defaultCorrect
  2. BThe full notional of the portfolio, since collateral does not reduce credit risk
  3. COnly the credit risk of the collateral posted by the dealer itself
  4. DSettlement risk on cash flows exchanged at trade inception

Explanation

Even with zero threshold and frequent calls, the value of the portfolio can move during the margin period of risk, from the last collateral exchange to close-out. Collateral also carries valuation, wrong-way and liquidity risks. Notional is not the exposure measure, and the other options do not describe the main residual component.

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