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Credit value adjustment: Difference between revisions
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===[[Credit value adjustment]]s=== | ===[[Credit value adjustment]]s=== | ||
A [[credit value adjustment]] — to its friends '''[[CVA]]''' — is a calculation made by financial reporting types to [[financial instrument]]s one holds to account for changes in the [[creditworthiness]] of the [[issuer]] of those instruments since their issue. For a liquid instrument the [[CVA]] ought really to be baked into the [[mark-to-market]] value of the instrument. For a [[Variation margin|collateralised]] one, it ought to be small. As far as this [[Jolly Contrarian|bear of little brain]] can see, it ought really to be the difference between the [[present value]] of the notional [[cashflows]] due on that instrument (that is, ignoring the risk of [[default]]) and the price at which that instrument is trading. | A [[credit value adjustment]] — to its friends '''[[CVA]]''' — is a calculation made by financial reporting types to [[financial instrument]]s one holds to account for changes in the [[creditworthiness]] of the [[issuer]] of those instruments since their issue. For a liquid instrument the [[CVA]] ought really to be baked into the [[mark-to-market]] value of the instrument. For a [[Variation margin|collateralised]] one, it ought to be small. As far as this [[Jolly Contrarian|bear of little brain]] can see, it ought really to be the difference between the [[present value]] of the notional [[cashflows]] due on that instrument (that is, ignoring the risk of [[default]]) and the price at which that instrument is trading. | ||
===[[Debt value adjustment]]s=== | ===[[Debt value adjustment]]s — [[snake oil]] alert=== | ||
:''“[[DVA]] has caused a lot of confusion because banks are allowed to record gains as their credit quality deteriorates. While there are pros and cons to including [[DVA]] in earnings, most people see it as accounting gimmickry that doesn’t reflect any true economic value.” | :''“[[DVA]] has caused a lot of confusion because banks are allowed to record gains as their credit quality deteriorates. While there are pros and cons to including [[DVA]] in earnings, most people see it as accounting gimmickry that doesn’t reflect any true economic value.” | ||
::—David Kelly, Quantifi, 2009, quoted in [https://www.euromoney.com/article/b12kjc667rjrsq/the-truth-behind-cvas-dvas-and-banking-results?copyrightInfo=true Euromoney] | ::—David Kelly, Quantifi, 2009, quoted in [https://www.euromoney.com/article/b12kjc667rjrsq/the-truth-behind-cvas-dvas-and-banking-results?copyrightInfo=true Euromoney] | ||