Is CVA a testable topic in 2013

[anand99]

Hi David,

I found an extensive discussion in your 2012 Credit Risk 6.b video on the topic of CVA. This video has not been updated in the 2013 Part 2 package, so I assume it is still relevant. However, I found that there is hardly any mention of CVA in the aims for part 2. All I found was this on the paper by Ashcroft and Schuerman. Can you clarify why there is no mention of CVA in the aims?

Adam Ashcroft and Til Schuermann, “Understanding the Securitization of Subprime Mortgage Credit,” Federal

Reserve Bank of New York Staff Reports, no. 318, (March 2008).

Candidates, after completing this reading, should be able to:


• Explain the subprime mortgage credit securitization process in the United States.

• Identify and describe key frictions in subprime mortgage securitization, and assess the relative contribution of

each factor to the subprime mortgage problems.

• Describe the characteristics of the subprime mortgage market, including the creditworthiness of the typical

borrower and the features and performance of a subprime loan.

• Explain the structure of the securitization process of the subprime mortgage loans.

• Describe the credit ratings process with respect to subprime mortgage backed securities.

• Explain the implications of credit ratings on the emergence of subprime related mortgage backed securities.

• Describe the relationship between the credit ratings cycle and the housing cycle.

• Explain the implications of the subprime mortgage meltdown on the management of portfolios.

• Compare the difference between predatory lending and borrowing.

 

[Andrew Wedemier]

Hi anand99,

Based on my experience from the Part 2 exam, I would say CVA is testable. I recall at least 1 question on calculating a CVA spread. It was a relatively simple cal, but it was still there. Actually, it was very similar to an example you may have seen in David's video.

You may want to check the new readings by Jon Gregory, Counterparty Credit Risk for the aims that mention CVA.

 

[David Harper CFA FRM]

Hi anand99,

We have updated videos on CVA coming this semester (specifcally, September: http://forum.bionicturtle.com/threads/2013-frm-calendar-updated-6-25-13.6642/ )
As Andrew suggests, CVA has been expanded, largely by way of the new Gregory chapters
(there may have been limited CVA questions on the May exam, but it's typical for new content like Gregory to take more than one exam cycle to "show up," so I would expect the CVA to increase in prominence per the AIMs.).

Although CVA appears in other Gregory chapters, it's entirely the focus of Gregory's Chapter 7 (Pricing Counterparty Risk, I), with the following AIMs:
Explain the motivation of pricing counterparty risk.

• Define and calculate credit value adjustment (CVA) when no wrong-way risk is present.
• Describe the process of approximating the CVA spread.
• Define and calculate the incremental CVA and the marginal CVA.
• Describe how collateralization and netting affect the CVA price.
• Explain challenges in pricing CVA arising from the presence of exotic products and the issue of path dependency.
• Define and calculate CVA and CVA spread in the presence of a bilateral contract.
• Explain issues that need to be considered in pricing bilateral CVA