Credit Risk Management Practice Exam 2025 – Complete All-in-One Guide to Master Your Exam!

The correct representation of the relationship between Basis Credit Valuation Adjustment (BCVA), Credit Valuation Adjustment (CVA), and Debit Valuation Adjustment (DVA) is effectively captured by the equation BCVA = CVA + DVA.

This relationship reflects how BCVA accounts for both the counterparty credit risk (CVA) and the entity's own credit risk (DVA). CVA measures the risk of loss due to the counterparty defaulting on their obligations. Conversely, DVA measures the potential gain or loss to the entity if its own credit quality deteriorates.

By adding CVA and DVA, BCVA provides a comprehensive assessment of the overall credit risk exposure that takes into account both sides of the credit relationship. This holistic view is essential in credit risk management, as it helps organizations to factor in both potential losses from counterparty defaults and the impacts on their own credit position.

Understanding the interplay between these components is crucial for effective risk measurement and management strategies in financial contexts.