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Answer: CNY 114,615
The correct answer is B, which is CNY 114,615. The calculation of the bilateral Credit Valuation Adjustment (BCVA) from Bank Gamma's perspective involves two components: Credit Valuation Adjustment (CVA) and Debit Valuation Adjustment (DVA). 1. **CVA Calculation**: - CVA is the cost to Bank Gamma of the risk that Bank Phi might default. - It is calculated as the product of the Loss Given Default (LGD) of Bank Gamma, the Expected Positive Exposure (EPE), the Probability of Default (PD) of Bank Phi, and the probability that Bank Gamma itself does not default (1 - PD of Bank Gamma). - The formula used is: \( CVA_p = -LGD_p \cdot EPE_p \cdot PD_c \cdot (1 - PD_p) \) - Plugging in the values: \( CVA_p = -0.08 \cdot 60,000,000 \cdot 0.018 \cdot 0.975 = CNY -84,240 \) 2. **DVA Calculation**: - DVA is the benefit to Bank Gamma from its own credit risk, as it reduces the amount that Bank Phi would expect to pay in the event of a default by Bank Gamma. - It is calculated as the product of the LGD of Bank Phi, the Expected Negative Exposure (ENE), the PD of Bank Gamma, and the probability that Bank Phi does not default (1 - PD of Bank Phi). - The formula used is: \( DVA_p = -LGD_c \cdot ENE_c \cdot PD_p \cdot (1 - PD_c) \) - Plugging in the values: \( DVA_p = -0.18 \cdot -45,000,000 \cdot 0.025 \cdot 0.982 = CNY 198,855 \) 3. **BCVA Calculation**: - BCVA is the sum of CVA and DVA, representing the net adjustment for credit risk between the two banks. - The formula is: \( BCVA = CVA + DVA \) - Adding the calculated values: \( BCVA = -84,240 + 198,855 = CNY 114,615 \) The other options provided: - A is incorrect because it only represents the CVA of Bank Gamma without considering the DVA. - C is incorrect as it only represents the DVA of Bank Gamma. - D is incorrect because it incorrectly switches the expected exposures in the CVA and DVA formulas and ignores the sign of BCVA. This question tests the understanding of calculating DVA, BCVA, and BCVA as a spread, which is a part of Credit Risk Measurement and Management.
Author: LeetQuiz Editorial Team
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In a training session for new junior risk analysts, a senior risk manager at Bank Gamma explains the concept and calculation of Bilateral Credit Valuation Adjustment (BCVA). The risk manager uses a hypothetical scenario where Bank Gamma and Bank Phi are the only counterparties involved and provides the following specific details regarding Bank Gamma:
The expected positive exposure (EPE) to Bank Phi, discounted, amounts to CNY 60 million. The expected negative exposure (ENE) to Bank Phi, discounted, is CNY 45 million.
Additional essential information about both banks is given as follows:
| Parameter | Bank Gamma | Bank Phi |
|---|---|---|
| Annual probability of default | 2.5% | 1.8% |
| Recovery rate | 82% | 92% |
Considering the perspective of Bank Gamma, what would be the calculation for the BCVA?
A
CNY 84,240
B
CNY 114,615
C
CNY198,855
D
CNY201,960