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Answer: CNY 114,615
## Explanation B is correct. Let p denote Bank Gamma as the party (as the party making the calculation), and c denote Bank Phi as counterparty. Also, note that the BCVA = CVA + DVA So, **CVAₚ** = – LGD꜀ * EPEₚ * PD꜀ * (1 – PDₚ) = – (0.08 * 60,000,000 * 0.018 * 0.975) = CNY -84,240 **DVAₚ** = – LGDₚ * ENE꜀ * PDₚ * (1 – PD꜀) = – (0.18 * -45,000,000 * 0.025 * 0.982) = CNY 198,855 Therefore, **BCVA** = CVA + DVA = CNY -84,240 + CNY 198,855 = CNY 114,615 **Why other options are incorrect:** - A is incorrect. CNY 84,240 is the CVA of Bank Gamma and the negative sign is ignored. - C is incorrect. CNY 198,855 is the DVA of Bank Gamma. - D is incorrect. CNY 201,960 is the result obtained when the expected exposures in the CVA and the DVA formulas are switched and ignored the sign of BCVA. **Key Formulas:** - LGD (Loss Given Default) = 1 - Recovery Rate - CVA = -LGD_counterparty × EPE × PD_counterparty × (1 - PD_own) - DVA = -LGD_own × ENE × PD_own × (1 - PD_counterparty) - BCVA = CVA + DVA
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A senior risk manager at Bank Gamma is presenting to a group of newly hired junior risk analysts on calculating bilateral CVA (BCVA). To illustrate the calculations, the manager assumes that Bank Gamma and Bank Phi are the only counterparties to each other and provides the following information about Bank Gamma:
Additional information on the two banks is shown below:
| Parameter | Bank Gamma | Bank Phi |
|---|---|---|
| Annual probability of default | 2.5% | 1.8% |
| Recovery rate | 82% | 92% |
What is the BCVA from Bank Gamma's perspective?
A
CNY 84,240
B
CNY 114,615
C
CNY 198,855
D
CNY 201,960