Credit valuation adjustment

CVA related concepts:
The mathematical concept as defined below; A part of the regulatory Capital and RWA (risk-weighted asset) calculation ^[1] introduced under Basel 3; The CVA desk of an investment bank, whose purpose is to: hedge for possible losses due to counterparty default; hedge to reduce the amount of capital required under the CVA calculation of Basel 3; The "CVA charge". The hedging of the CVA desk has a cost associated to it, i.e. the bank has to buy the hedging instrument. This cost is then allocated to each business line of an investment bank (usually as a contra revenue). This allocated cost is called the "CVA Charge".

A Credit valuation adjustment (CVA), ^[a] in financial mathematics, is an "adjustment" to a derivative's price, as charged by a bank to a counterparty to compensate it for taking on the credit risk of that counterparty during the life of the transaction. CVA is one of a family of related valuation adjustments, collectively xVA; for further context here see Financial economics § Derivative pricing. "CVA" can refer more generally to several related concepts, as delineated aside. The most common transactions attracting CVA involve interest rate derivatives, foreign exchange derivatives, and combinations thereof. CVA has a specific capital charge under Basel III, and may also result in earnings volatility under IFRS 13, and is therefore managed by a specialized desk.

^ Basel Committee (2020). Credit valuation adjustment framework
^ A Guide to Modeling Counterparty Credit Risk, GARP Risk Review, July–August 2007 Related SSRN Research Paper
^ Patrik Karlsson, Shashi Jain. and Cornelis W. Oosterlee (2016). "Credit Exposures for Interest Rate Derivatives using the Stochastic Grid Bundling Method". Applied Mathematical Finance.

Cite error: There are <ref group=lower-alpha> tags or {{efn}} templates on this page, but the references will not show without a {{reflist|group=lower-alpha}} template or {{notelist}} template (see the help page).

[1] Basel Committee (2020). Credit valuation adjustment framework

[2] A Guide to Modeling Counterparty Credit Risk, GARP Risk Review, July–August 2007 Related SSRN Research Paper

[3] Patrik Karlsson, Shashi Jain. and Cornelis W. Oosterlee (2016). "Credit Exposures for Interest Rate Derivatives using the Stochastic Grid Bundling Method". Applied Mathematical Finance.

[1]

[a]