"In banking, particularly recently, one
often hears the term “Credit Value Adjustment” or CVA. Is it a new fashion
trend in the world of finance world is it there more to it? Why are traders,
quants, and risk officers at large institutions feverishly trying to deal with
this topic all of a sudden? It turns out that the increased focus on
counterparty risk after the financial crisis as well as the new Basel
requirements for bank capitalization (see document) have added urgency
to the CVA implementation by international banks, forcing them to focus on the
topic."
"The CVA measure is different from the
concept of standard Credit Risk because it combines the uncertainty of exposure
with the bilateral nature of exposure. It measures the risk that the
counterparty to a financial contract will default prior to its expiration and
will not make the specified payments. At the same time the amount of those
specified payments may have increased due to market movements."
