Solutions

CVA

Credit Valuation Adjustment (CVA) is the adjustment imposed on transaction valuation to reflect the counterparty’s credit quality. As such, it represents the market value of counterparty credit risk. To evaluate credit risk due to probability of counterparty default, one-sided CVA (or simply CVA) is usually applied. To assess derivative transactions with counterparty or associated market risk, a two-sided CVA (or CVA with debt valuation adjustment – DVA) is used.

After 2007-2009 financial crisis, the importance of CVA in risk management continuously grows, along with its regulatory enforcement. Basel III introduces a CVA risk charge to capital, as during the crisis CVA losses in many cases exceeded unexpected losses. An accurate measure of CVA is critical to prudent risk-taking, as it makes more transparent the risk-reward tradeoff in a given transaction.

PrevioRisk CVA module offers financial institutions and corporate treasury operations a clear and effective solution to their CVA and DVA requirements:

  • CVA can now be a key part of the daily workflow that provides an option to view Unilateral or Bilateral CVA, DVA & Legal Entity Information at the counterparty trade level, or aggregated on the fly up to trader, desk, country, sector or portfolio level.
  • Ability to define characteristics of legal entities and agreements between them, and to link transactions to relevant agreements.
  • Fast computing of incremental CVA pricing for new trades using a flexible interface, capturing the effects of legal documents and agreements (netting, margining and collateral).
  • Traders now can factor in the cost of credit risk when making trading decisions. CVA computation – a data intensive exercise – can be performed easily with PrevioRisk using the data collated from various sources.

PrevioRisk CVA is based on the latest market best practices which model and capture key elements such as collateral and netting sets.

 

Process Flow


Process Flow

 

Credit Valuation Adjustment (CVA) — Conceptual Design


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