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CVA, or Credit Value Adjustment, is an additional charge that a client must pay for a derivatives transaction, to compensate their counterparty for the fact that they are not risk free and may default on obligations which arise from the derivatives contract. The easiest way to illustrate CVA is through a risky bond transaction (though …Read more
Currently, the mandated formula for the calculation for CVA, for regulatory purposes, is as follows Which equates to Where is the probability of default between time and . For further definitions of the variables in the equation see Basel III. pg 31 – 32. Basel III enforces recognition of Wrong-way risk. Wrong-way risk is the state …Read more