Explanation:
The correct answer is C.
Credit valuation adjustment refers to the difference between the risk-free value of a contract and the true value of the contract that takes into account the possibility of default by the counterparty. It’s also defined as the market value of counterparty credit risk.
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Q.1965 In financial risk management, the term 'Credit Valuation Adjustment' (CVA) is frequently used. This term is associated with the evaluation of potential risks that may arise due to the default of a counterparty in a financial contract. Which of the following options best defines 'Credit Valuation Adjustment' in this context?
A
The market value of counterparty market risk.
B
The difference between the potential future exposure (PFE) and the expected exposure of a derivative contract.
C
The market value of counterparty credit risk.
D
The process of loading a premium onto the risk-free rate to account for various risks such as interest rate risk, liquidity risk, and default risk.
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