That's great at time T when we price the trade, but the incremental CVAs are not additive - they don't sum up to the nettingset's CVA and it depends on the order of the trades.
I hope that is helpful!"[Incremental CVA] makes the most sense when the CVA needs to be charged to individual traders and business. The [incremental] CVA depends on the order in which trades are executed but does not change due to subsequent trades. A CVA desk (Chapter 18) charging this amount will directly offset the impact on their PnL from the change in CVA from the new trade ...
Marginal CVA may be useful to break down a CVA for any number of netted trades into trade-level contributions that sum to the total CVA. Whilst it might not be used for pricing new transactions (due to the problem that marginal CVA changes when new trades are executed, implying PnL adjustment to trading books), it may be required for pricing trades transacted at the same time (perhaps due to being part of the same deal) with a given counterparty. Alternatively, marginal CVA is the appropriate way to calculate the trade-level CVA contributions at a given time. This may be useful where a CVA desk is concerned about their exposure to the default of a particular counterparty."
Hello @ijoomaHi David
I have 2 questions.
What does the marginal CVA represent? I get the incremental is dependent on the EE of the next trade (please correct me if I am wrong). However I don’t get the marginal or how to derive the marginal cva. Please can you explain
Second question relates to table 14.6 in Greggory. On the incremental cva (5,4,3,2,1) why does the incremental cva on the 1st point not equal to the stand alone for the payer irs 5y (0.2587)
Thanks
Hi @David Harper CFA FRM, I have the same doubt. Please advice.Hi David,
Reading all of that, one simple question that is not 100% clear to me, CVA is performed for each trade of a counterpart (each trade of the counterpart will have different CVA) or for a counterpart itself (all trades with the counterpart will have the same CVA).
Thank you in advance
Regards
"Note that NEE is also the negative EE from the counterparty’s point of view. This shows an important feature of Equation 14.10a, which is that a party’s CVA loss is exactly their counterparties DVA gain and vice versa. This is the price symmetry property of BCVA." -- Gregory, Jon. The xVA Challenge: Counterparty Credit Risk, Funding, Collateral, and Capital (The Wiley Finance Series) (p. 328). Wiley. Kindle Edition.