medium · Frm Part 2 Credit Risk
When computing the Credit Valuation Adjustment (CVA) for a counterparty, which probability distribution should be used for default timing to ensure the adjustment represents a 'hedged price' rather than an 'actuarial reserve'?
- Through-the-cycle (TTC) default probabilities to ensure stability in valuation.
- Risk-neutral default probabilities bootstrapped from the counterparty's CDS curve.
- Real-world drift-adjusted probabilities using the firm's expected return on assets.
- Physical default probabilities derived from historical transition matrices and ratings.
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