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 decided to ignore its own default risk (DVA) in the pricing of the new trade.
- The trade is fully collateralized, which mathematically forces the incremental CVA to zero.
- The counterparty's credit spread has tightened significantly since the last trade was booked.
- 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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