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

A dealer's CSA with a hedge fund requires daily variation margin, but a dispute-and-valuation process means that after the counterparty's last margin payment, up to 10 business days may pass before positions are closed out following default. Which concept does this period represent, and what is its effect on CVA modeling?

This is the margin period of risk, the time between the last collateral exchange and close-out after default. Longer periods let exposure move uncollateralised, raising potential future exposure and CVA even when variation margin is exchanged daily.

  1. AMargin period of risk; a longer period increases potential exposure even with daily marginingCorrect
  2. BThreshold; a longer period reduces the uncollateralised amount
  3. CMinimum transfer amount; a longer period lowers exposure by delaying calls
  4. DRehypothecation period; a longer period eliminates wrong-way risk

Explanation

The margin period of risk is the time from the last successful collateral exchange to close-out and replacement. Over that time the exposure can move without collateral, so a longer period raises the exposure that CVA must capture. The other terms describe different CSA features.

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