Module 15 · Advanced

CVA — credit valuation adjustment

The last two modules set this up. CVAis the dollar price of the risk that your counterparty defaults while a trade is in your favour — and it's a real charge subtracted from every uncollateralized derivative's value.

It multiplies the two things you just built: how much you'd be owed (the expected exposure profile) × how likely they are to default (from their CDS spread / hazard rate) × the loss if they do(1 − recovery), discounted and summed over the life of the trade:

CVA = (1 − recovery) × Σ EE(t) × default-prob(t) × DF(t)

It's why a bank quotes a worse price to a risky counterparty than a safe one — the CVA charge is baked into the spread. Widen the counterparty's spread below and watch the charge climb.

🎛 CVA calculator

100M
5y
100 bp/yr
150 bp
40%

Credit Valuation Adjustment (the price of counterparty risk)

−$57,488

5.7 bp of notional · knocked off the swap's fair value

Peak expected exposure

$1,568,916

Loss given default

60%

CVA = (1 − recovery) × Σ  expected exposure  ×  default probability  ×  discount

CVAis the dollar value of the risk that your counterparty defaults while the trade is in your favour. It combines the two previous ideas: how much you'd be owed (expected exposure, from the simulation) times how likely they are to default (from their CDS spread / hazard rate) times the loss if they do. Every uncollateralized derivative is priced net of CVA— it's a real charge that reduces the trade's value. Widen the counterparty's spread and watch the charge climb. Educational tool — not investment advice.

Things to try

  • • Widen the counterparty spread from 50 to 500 bp — the CVA charge climbs steeply.
  • • Raise rate volatility — bigger exposure means bigger CVA, even for the same counterparty.
  • • Push recovery up — less is lost on default, so CVA shrinks.
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