CVA and DVA

[Shadma]

While calculating CVA and its properties do we need to use negative sign???

 

[QuantMan2318]

Hi @Shadma
Can you be a bit more clear? Which formula are you referring to in CVA?

The value for CVA is just:

\[ (1- Recovery Rate) * \Sigma_{i=1}^m DF(t_i) * EE(t_i) * PD(t_{i-1},t_i) \]

So which part are you referring to?

 

[Flashback]

While calculating CVA and its properties do we need to use negative sign???

Value of CVA is marked with positive prefix as this is considered as a cost.
Value of DVA is usually marked with negative prefix as a cost deduction.
Thus, stand-alone CVA cannot be negative while net BCVA can be negative in the event of larger DVA value.
Hope that might help.

 

[Shadma]

As per Gregory chapter 14 he has introduced a negative sign in CVA formula, so am a little confused as to what should be the impact of credit spread and recovery on CVA. Whether we have to consider the magnitude or sign also

 

[Flashback]

That’s trivial. If you use negative prefix for CVA, you must use a positive one for DVA in BCVA equation and vice versa. Same as with any other cost recognition in ledgers.