medium · FRM Part 2 Credit Risk
A bank calculates the Credit Valuation Adjustment (CVA) for a derivative netting set.
If the bank adds a new trade to the set that is perfectly negatively correlated with the existing exposure, what happens to the Incremental CVA?
- It will be zero, since under this framework CVA is only ever priced at the standalone trade level.
- It will equal the standalone CVA of the new trade, since incremental and standalone CVA are the same quantity.
- It will be negative, as the new trade reduces the Expected Positive Exposure (EPE) of the netting set.
- It will be positive, because adding any new trade to the netting set always raises total exposure.
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