P2.T6.332. Incremental and marginal credit value adjustment (CVA)

[Nicole Seaman]

AIMs: Define and calculate the incremental CVA and the marginal CVA. Describe how collateralization and netting affect the CVA price.

Questions:

332.1. To price a new trade with the impact of netting, we can calculate the change in CVA, which is called the "incremental CVA" created by the new trade. Incremental CVA is given by the following:

(Source: Jon Gregory, Counterparty Credit Risk: The New Challenge for Global Financial Markets (West Sussex, UK: John Wiley & Sons, 2010))

About Incremental CVA, each of the following is true EXCEPT which is false?

a. Incremental CVAs are not additive: the sum of incremental CVAs is not meaningful
b. Incremental CVA must be less than or equal to Stand-alone CVA
c. Incremental CVA must be greater than or equal to zero; i.e., cannot be negative
d. Incremental CVA is useful for looking at the impact of adding (or removing) a given trade to (from) the netting set of existing trades


332.2. Each of the following is true about Marginal CVA except which is false?

a. By definition, Marginal CVA must be less than or equal to Incremental CVA
b. Unlike Incremental CVA, Marginal CVA is additive: the sum of Marginal CVAs is the total CVA
c. Marginal CVA is more relevant (than Incremental CVA) for apportioning CVA contributions fairly across existing trades or assessing the CVA of more than one new trade
d. Whereas it is difficult to price simultaneous trades with Incremental CVA, Marginal CVA is the appropriate way to calculate the trade-level CVA contributions of several trades at the same time


332.3. The following calculation for credit value adjustment (CVA) has four components:

Which of the four components is impacted by collateral?

a. 1 only
b. 3 only
c. 4 only
d. All except for 2

Answers:

• Here in forum

 

[saurav_m_cse]

Hi David / Suzzane,
I am paid member since Aug 15th 2013. Going by what is mentioned in the website, it seems that the Daily Questions are periodically consolidated in the study planner. I can see some of the operational risk related Practice Questions pdf already. So i am not following Daily Questions. I am assuming that all the Daliy questions would be posted in the study planner after a delta 'T" time. Kindly Confirm
Regards
Saurav

 

[David Harper CFA FRM]

Hi Saurav, yes absolutely. It is not really convenient to follow the Daily Question: its purpose is to "share" our practice question discipline (Mon to Thursday, each day a new 3-part question) and to get feeback (error correction) from the minority who do follow the questions (or reference them subsequently via the forum browse).

So you are correct: our key process is to collect the questions into a per-reading PDF when we finish the reading. For example, after this question (T6.332), we publish T6.333, which will conclude Gregory's Chapter 7 (Pricing Counterparty Credit Risk, I) and we will collect them into a PDF and locate it in the Study Planner.

But weekly our process includes update/revisions to the PDFs, so they are always the "best" PQ resource, albeit they "trail" the forum postings due to the lag between individual PQ publish and subsequent PDF set publish.

So, all of these questions do appear in the Study Planner, Thanks!

 

[shahatul]

why i am not able to see bitmaps?

 

[Suzanne Evans]

@shahatul,

We apologize for the inconvenience and have reported this to our developer. We will get these images back ASAP.

 

[nickst11]

AIMs: Define and calculate the incremental CVA and the marginal CVA. Describe how collateralization and netting affect the CVA price.

Questions:

332.1. To price a new trade with the impact of netting, we can calculate the change in CVA, which is called the "incremental CVA" created by the new trade. Incremental CVA is given by the following:

About Incremental CVA, each of the following is true EXCEPT which is false?

a. Incremental CVAs are not additive: the sum of incremental CVAs is not meaningful
b. Incremental CVA must be less than or equal to Stand-alone CVA
c. Incremental CVA must be greater than or equal to zero; i.e., cannot be negative
d. Incremental CVA is useful for looking at the impact of adding (or removing) a given trade to (from) the netting set of existing trades

332.2. Each of the following is true about Marginal CVA except which is false?

a. By definition, Marginal CVA must be less than or equal to Incremental CVA
b. Unlike Incremental CVA, Marginal CVA is additive: the sum of Marginal CVAs is the total CVA
c. Marginal CVA is more relevant (than Incremental CVA) for apportioning CVA contributions fairly across existing trades or assessing the CVA of more than one new trade
d. Whereas it is difficult to price simultaneous trades with Incremental CVA, Marginal CVA is the appropriate way to calculate the trade-level CVA contributions of several trades at the same time

332.3. The following calculation for credit value adjustment (CVA) has four components:

Which of the four components is impacted by collateral?

a. 1 only
b. 3 only
c. 4 only
d. All except for 2

Answers:

• Here in forum

Hi - I have the following answers for the above questions but am unable to view if they are correct. Please can you verify?

332.1 c
332.2 a
332.3 b

Thx,
Nick

 

[Nicole Seaman]

Hi - I have the following answers for the above questions but am unable to view if they are correct. Please can you verify?

332.1 c
332.2 a
332.3 b

Thx,
Nick

Hello @nickst11

The answers to the daily practice questions are only available to our paid members who purchase one of our study packages. The reason for this is because these questions are part of our paid practice question sets that are published in the study planner.

Thank you,

Nicole