The market value of counterparty credit risk on a derivative, deducted from its risk-free value. It is roughly the expected exposure times the default probability times the loss given default.
Where you will meet it
Credit valuation adjustment comes up in 28 learning outcome notes across the FRM syllabus.
A few of them:
Exchanges and OTC Markets FRM Part I · Financial markets and products
“Mitigants include close-out netting, collateral under a credit support annex, central clearing for standard products, credit limits, rating triggers, payment-versus-payment settlement, diversification, and credit valuation adjustment priced into the trade.”
Estimating Default Probabilities FRM Part II · Credit risk measurement and management
“Valuing a credit derivative, pricing a loan at market value, or computing a CVA charge for accounting purposes needs risk-neutral probabilities, because the price must be consistent with other traded instruments.”
High-level summary of Basel III reforms FRM Part II · Operational risk and resilience
“For CVA risk, the internal model approach is withdrawn, leaving the basic approach (BA-CVA) and the standardised approach (SA-CVA).”
Credit Risk FRM Part II · Credit risk measurement and management
“Credit valuation adjustment (CVA) is the present value of the expected loss from the counterparty defaulting before the contract ends.”
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