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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=== | ===[[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 | 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 more or less zero. As far as this [[Jolly Contrarian|bear of little brain]] can see, the credit value adjustment ought really to be the difference between the [[present value]] of the remaining expected [[cashflows]] due on that instrument (assuming it does not [[default]]) and the price at which that instrument is presently trading. | ||
The theory is that since you strike the [[spread]] on your debt instrument when it is issued, and the spread doesn’t change, it reflects your creditworthiness ''at that moment''. Should your fortunes then improve, the value of your [[indebtedness]] should rise, because the interest it pays reflects a higher risk than the one you now present. And vice versa. | |||
===[[Debt value adjustment]]s — {{t|snake oil}} alert=== | ===[[Debt value adjustment]]s — {{t|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.” | ||