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Describe the term xva

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Reference no: EM133071432

Situation: Market: 

A corporate borrower ended into an interest rate swap with a money center bank last year. Interest rates have moved fortuitously in the borrower's favor. The fair value of the swap is now $2,625,000 in the money for the borrower.

The money center bank has an approximate implied probability of default of eighty-seven basis points (87bp), derived from market-based products such as the bank's corporate bonds and Credit Default Swaps (CDS).

  1. Suggest an accounting or booking-keeping adjustment the corporate borrower should make to the fair value of the derivative before recognizing a mark to market gain on the swap.
  2. Briefly describe the term XVA and how it applies to derivatives.
  3. In practical terms, why may it be more difficult calculating a derivative's credit riskiness than determining the credit riskiness on a loan or a bond?

Reference no: EM133071432

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