medium · FRM Part 2 Credit Risk
A bank is pricing a new 'pay-fixed' interest rate swap with a counterparty where it already has a large 'receive-fixed' swap portfolio. The standalone CVA of the new trade is positive.
What is the most likely impact on the bank's total netting-set CVA after adding the trade?
- The total CVA will increase because variation margin must now be posted separately on each of the two offsetting trades.
- The total CVA may decrease because the new trade reduces the expected positive exposure (EPE) of the netted portfolio.
- The total CVA must increase because standalone CVA is always non-negative for any new derivative trade added.
- The total CVA will remain unchanged as long as the counterparty's underlying CDS spread curve does not move at all.
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