Skip to content

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

A risk manager computes CVA for a portfolio assuming exposure and default are independent. Which statement is correct about moving to a model that captures wrong-way risk through positive dependence between exposure and hazard rate?

CVA generally rises. With wrong-way dependence, the expected exposure conditional on the counterparty defaulting is higher than the unconditional expected exposure used under independence, so the expected loss, and therefore CVA, is larger than the independent calculation shows.

  1. ACVA generally increases because expected exposure conditional on default is higher than unconditional expected exposureCorrect
  2. BCVA generally decreases because default probabilities fall when exposure rises
  3. CCVA is unchanged because CVA depends only on the recovery rate
  4. DCVA generally decreases because the exposure profile is netted

Explanation

CVA integrates loss given default times expected exposure conditional on default times default probability. With positive dependence, exposure at default exceeds the unconditional average, so CVA rises. Recovery alone does not determine CVA, and netting is unrelated to the dependence.

Did you get it right without looking?

One question tells you little. A timed set on Credit Value Adjustment shows your real accuracy, how long you take and where you lose marks.

Practise Credit Value AdjustmentFree diagnostic mock

More Credit Value Adjustment questions