Credit Risk Management Practice Exam 2026 – Complete All-in-One Guide to Master Your Exam!

In the context of calculating Credit Valuation Adjustment (CVA), the factors considered are essential for assessing the credit risk associated with derivative transactions.

Expected Exposure (EE) is a critical factor as it represents the average expected amount of credit exposure that a counterparty might owe at any given point in time over the life of a derivative contract. This metric helps in estimating how much could potentially be lost if the counterparty defaults.

Probability of Default (PD) is another vital component as it indicates the likelihood that a counterparty will fail to meet its obligations. This risk measure directly influences the CVA calculation by assessing the chances of default over the duration of the exposure.

Loss Given Default (LGD) is important as it provides an estimate of the loss incurred by a lender if a borrower defaults. This measure considers the fraction of the exposure that will not be recovered upon default and is crucial for understanding the potential financial impact of a default event.

On the other hand, unilateral agreement terms do not play a direct role in calculating CVA. While they may affect the overall credit risk assessment and terms of the contract, they do not represent a quantifiable measure within the specific calculation of CVA. Therefore, this factor is not involved in the CVA computation.