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Credit value adjustment: Difference between revisions
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{{g}}''Warning: ramblings of an untutored maniac here.'' | {{g}}''Warning: ramblings of an untutored maniac here.'' | ||
===[[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=== | ||
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Right. You don’t have any money, so you would have to borrow it. Even if you could find someone prepared to lend to a soon-to-be-bankrupt company (look, it does happen), it would lend to you at your current state of indebtedness. So you would be trading your apparently cheap [[indebtedness]] for ''more expensive [[indebtedness]]''. | Right. You don’t have any money, so you would have to borrow it. Even if you could find someone prepared to lend to a soon-to-be-bankrupt company (look, it does happen), it would lend to you at your current state of indebtedness. So you would be trading your apparently cheap [[indebtedness]] for ''more expensive [[indebtedness]]''. | ||
{{sa}} | |||
*[https://ftalphaville.ft.com/2011/10/13/701766/how-one-banks-default-is-the-same-banks-gain/ Lisa Pollack of FT Alphaville in typically sparkling form] | |||