Financial derivatives

Question 1

What is the purpose of Credit Valuation Adjustment

Answer 1

• Reflects the potential loss to a bank due to a counterparty’s default.
• Represents the present value of expected losses from potential defaults.

Question 2

What is the purpose of Debit Valuation Adjustment

Answer 2

• Accounts for potential gains from the bank’s own default.
• Reflects situations where the bank might not need to fulfil negative-value
  obligations

Question 3

How do Accounting for Financial Instruments and Banking Basel Regulations for Financial Institutions differ in their regulations

Answer 3

Accounting for Financial Instruments - Credit Impairment requires all
companies to take both CVA and DVA into consideration.

Banking Basel Regulations for Financial Institutions requires
adjustments due to CVA