medium · FRM Part 2 Credit Risk
A risk analyst is pricing a new credit-sensitive derivative. The 'incremental CVA' for the trade with Counterparty A is negative, despite the 'standalone CVA' being positive.
What is the most likely reason for this?
- The bank has chosen to ignore its own default risk, meaning DVA, when pricing this brand-new derivative trade entirely.
- The trade is fully collateralized, which under standard CVA mechanics mathematically forces the incremental charge to exactly zero.
- The counterparty's credit spread has tightened noticeably since the earlier trade in this same netting set was originally booked and confirmed.
- The new trade acts as a hedge to the existing netting set with Counterparty A, reducing the overall expected exposure profile.
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