Credit Risk Management Practice Exam

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What is Marginal CVA primarily used for?

To assess the probability of counterparty default
To evaluate trade-level attribution
To determine the overall market risk
To calculate exposure at default

The correct answer is: To evaluate trade-level attribution

Marginal Credit Valuation Adjustment (CVA) is primarily used to evaluate trade-level attribution, which involves assessing the impact of specific trades on the overall credit risk exposure of a portfolio. It quantifies how much the creditworthiness of the counterparty affects the valuation of individual trades, providing insight into which trades are contributing most significantly to the risk profile. This metric helps institutions understand and manage their risk at a more granular level. By looking at Marginal CVA, risk managers can make informed decisions on which trades may require more capital allocation or where hedging strategies may need to be implemented. This focus on trade-level dynamics allows for a more precise evaluation of risks and leading to better risk management and optimization of the trading portfolio.