Using credit valuation adjustment to set limits

Credit valuation adjustment for energy and commodity derivatives: part two

Credit valuation adjustment for energy and commodity derivatives - part two

When two entities enter into a series of transactions, they also exchange an implicit option to default. Credit valuation adjustment (CVA) is the price or cost of credit risk for a deal or portfolio with a given counterparty.

CVA can be calculated at the individual transaction level or for each counterparty portfolio. The overall CVA for the exposures with a given counterparty is not simply the sum of the CVAs for individual deals, because of the need to take into account credit risk mitigation

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This Risk special report provides an insight on the challenges facing banks in measuring and mitigating credit risk in the current environment, and the strategies they are deploying to adapt to a more stringent regulatory approach.

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