The impossibility of DVA replication

Some have argued that the debit valuation adjustment – which measures the benefit to a bank from its own potential for default – is monetisable. They claim replication strategies involving the dealer buying its own bonds, or writing protection on its peers, can achieve this. Not so, says Antonio Castagna, who argues that these strategies ignore subtle effects on the firm’s balance sheet


The debit valuation adjustment (DVA) that mark-to-market accounting rules insist should be included in derivatives’ prices in order to capture a bank’s own default risk is controversial because the dealer records paper profits – that could even be distributed as staff remuneration – when its creditworthiness deteriorates.

Some argue that the DVA is not merely an accounting adjustment, but instead is monetisable through replication strategies. US bank Goldman Sachs, for example, has been quite

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact or view our subscription options here:

You are currently unable to copy this content. Please contact to find out more.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to View our subscription options

Credit risk & modelling – Special report 2021

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.

The wild world of credit models

The Covid-19 pandemic has induced a kind of schizophrenia in loan-loss models. When the pandemic hit, banks overprovisioned for credit losses on the assumption that the economy would head south. But when government stimulus packages put wads of cash in…

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here