The impossibility of DVA replication

The impossibility of DVA replication

mathematics

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 op

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