Credit Valuation Adjustment

For Over –the- Counter (OTC) derivatives, in addition to the default risk capital requirements for counterparty credit risk, firms must calculate an additional capital charge to cover the risk of mark-to-market losses associated with deterioration in the creditworthiness of the counterparty. As the counterparty’s financial position worsens, the market value of its derivatives obligation declines, even though there might not be an actual default. During the financial crisis the CVA risk was a greater source of losses than those arising from outright defaults.

The CVA is the difference between the risk-free value of a portfolio of trades and the market value which takes into account the counterparty’s risk of default.  The CVA therefore represents an estimate of the adjustment to fair value that a market participant would make to incorporate the credit risk of the counterparty due to any failure to perform on contractual agreements.

For an overview of Credit Valuation Adjustment (CVA), please refer to our recent paper available under at the following link.


Credit Valuation Adjustment a simplified view.


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