Credit Value Adjustment

Glossary of Terms

• CVA - Credit Value Adjustment: The adjustment made to the MTM of a derivative to reflect the credit risk exposure of the bank to the counterparty
• FVA   Fair Value Adjustment (same as CVA)
• CRA Credit Risk adjustment (same as CVA)
• Trade Inception Charge (Credit Charge, Credit Intermediation Charge): Charge given to the originating desk by the
• CVA desk for taking on the credit risk of a trade
• Portfolio CVA: Calculating the CVA across multiple trades or counterparties to capture offsets or netting. Allows for marginal charges and hedging
• Trade CVA: Calculating CVA at the trade level. Does not allow for marginal charging or hedging
• CVA Desk: A trading desk which sell credit protection to the origination desk in return for a charge and manages the credit portfolio. May include loans as well as OTC
• Marginal CVA Charge Inception charge which is based on the marginal contribution of a trade to the portfolio
• DVA – Debit Value Adjustment: DVA can be offset against CVA for trades where there is a possibility of negative exposure.
• Proxy Hedge: Hedging using a CDS or CDS index that is closely correlated with the counterparty (but not the same as).
• Default Hedge: Hedging the full MTM replacement cost of the OTC product. As opposed to the hedging credit spread sensitivity
• Wrong-Way Risk When exposures to the counterparty tend to increase as their credit spread deteriorates
• CE -Counterparty exposure Is the larger of zero and the market value of the portfolio of derivative positions with a counterparty that would be lost if the counterparty were to default and there were zero recovery.
• EE - Expected Exposure Expected exposure is the average exposure on a future date. The curve of EE(t), as t varies over future dates, provides the expected exposure profile.
• EPE – Expected Positive Exposure Expected positive exposure is the average EE(t) for t in a certain interval.- used for CVA calculations.
• EOPD – End of Previous Day Applies to market and trade level state at previous business close
• ENE – Expected Negative Exposures Expected negative exposure is the average EE(t) for t in a certain interval – Used for DVA calculations
• IOPS – Input output operations per second Performance indicator for high IO processes
• Cross-gamma term: Dependent on the correlation between the credit spread and the market factors to which the portfolio is sensitive.
• CCR-Counterparty Credit Risk Counterparty credit risk is the risk that the counterparty to a financial contract will default prior to the expiration of the contract and will not make all the payments required by the contract. Only the contractsprivately negotiated between counterparties over-the-counter (OTC) derivatives and
  security financing transactions (SFT) are subject to counterparty risk. Exchange-traded derivatives are not affected by counterparty risk, because the exchange guarantees the cash flows promised by the derivative to
  the counterparties.