Learning Objectives: Calculate the debt value adjustment (DVA) and explain how stressing DVA enters into aggregating stress tests of CCR. Describe the common pitfalls in stress testing CCR.
Questions:
25.4.1. Xavier Bank, Inc. (the Bank) has financial exposure to four counterparties: Alpha Plc, Bravo Ltd, Charlie Ltd, and Delta Ltd. The Bank also has credit balances with these parties, as they have margin accounts opened with the Bank.
Based on the above, which counterparty has the highest BCVA adjustment?
a. Alpha Plc
b. Bravo Ltd
c. Charlie Ltd
d. Delta Ltd
25.4.2. A large financial institution is stress testing its credit exposures to other counter parties. There is a realization that the bank’s default could trigger counterparty defaults. The change in credit spread of the institution has increased its marginal probability of default to 500 basis points, expected to rise 500 basis points.
Under the given scenario, which counterparty would result in the smallest adjustment to the bank’s loan receivables?
a. Counterparty A
b. Counterparty B
c. Counterparty C
d. Counterparty D
25.4.3. During a risk committee meeting, a risk manager documented the credit analysis pertaining to four major counterparties of the bank. Stress testing was conducted, and the results are as follows:
Which of the following statements is NOT correct about the stress testing of Counterparty Credit Risks above?
a. The correlations between counterparties are ignored
b. There is no issue as the CVA and DVA have been calculated correctly
c. The stressed BVCA is greater than the unstressed net value adjustment
d. The survival probability of the Bank is highly optimistic
Answers here:
Questions:
25.4.1. Xavier Bank, Inc. (the Bank) has financial exposure to four counterparties: Alpha Plc, Bravo Ltd, Charlie Ltd, and Delta Ltd. The Bank also has credit balances with these parties, as they have margin accounts opened with the Bank.
Based on the above, which counterparty has the highest BCVA adjustment?
a. Alpha Plc
b. Bravo Ltd
c. Charlie Ltd
d. Delta Ltd
25.4.2. A large financial institution is stress testing its credit exposures to other counter parties. There is a realization that the bank’s default could trigger counterparty defaults. The change in credit spread of the institution has increased its marginal probability of default to 500 basis points, expected to rise 500 basis points.
Under the given scenario, which counterparty would result in the smallest adjustment to the bank’s loan receivables?
a. Counterparty A
b. Counterparty B
c. Counterparty C
d. Counterparty D
25.4.3. During a risk committee meeting, a risk manager documented the credit analysis pertaining to four major counterparties of the bank. Stress testing was conducted, and the results are as follows:
Which of the following statements is NOT correct about the stress testing of Counterparty Credit Risks above?
a. The correlations between counterparties are ignored
b. There is no issue as the CVA and DVA have been calculated correctly
c. The stressed BVCA is greater than the unstressed net value adjustment
d. The survival probability of the Bank is highly optimistic
Answers here:
