Skip to content

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

A risk manager debates whether to include DVA in the fair value of a bank's derivative liabilities. Which statement about DVA is most accurate?

DVA increases the value of the bank's derivative position as its own credit spread widens, producing a gain from worsening creditworthiness. This is counterintuitive and hard to hedge because the bank cannot trade its own credit, so regulators exclude DVA gains from capital.

  1. AIt increases the derivative's value to the bank as its own credit spread widens, which creates profit from deteriorating creditworthiness and is hard to hedgeCorrect
  2. BIt decreases liabilities when the bank's credit spread widens, making it conservative from a regulatory capital standpoint
  3. CIt is the cost of funding uncollateralised assets and is unrelated to the bank's own credit spread
  4. DIt is identical to CVA computed from the counterparty's perspective and therefore is always symmetrical and tradeable by the bank

Explanation

DVA reflects the bank's own default risk; wider own spreads reduce the value of its liabilities and produce accounting gains. This is hard to hedge since the bank cannot easily trade its own credit, and regulators remove it from capital. Option B has the sign reversed and C describes FVA.

Did you get it right without looking?

One question tells you little. A timed set on Counterparty Risk and Beyond shows your real accuracy, how long you take and where you lose marks.

Practise Counterparty Risk and BeyondFree diagnostic mock

More Counterparty Risk and Beyond questions