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For OTC derivatives, CVA is derived from an expected credit loss discounted at risk free rate to reflect counterparty credit risks
CVA(Credit Value Adjustment)
CVA
- Fair value adjustment of derivative contracts to reflect the credit risk of the counterparty
Fait value = Fair value(with no default risk) - CVA)
Method
Reflection on Discount Factor
CVA = ∑CFi(DFrf - DFr)
- DFrf : Discount factor without credit risk reflection
- DFr : Discount factor with credit risk reflection
Reflection of Discount Rate(YTM)
CVA = 100·exp(-rrf) - 100·exp(-rr)
- rrf : Discount rate without credit risk reflection
- rr : Discount rate with credit risk reflection