Credit Risk Management Practice Exam

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What primary element does the marginal CVA assess?

The overall credit market conditions
The determinants of the CVA on a trade level
The future trading opportunities of counterparties
The creditworthiness of the entire portfolio

The correct answer is: The determinants of the CVA on a trade level

The marginal credit valuation adjustment (CVA) focuses on the incremental risk that a new transaction introduces to the existing portfolio's credit exposure. This measure evaluates how much the credit risk of a specific trade influences the overall credit valuation adjustment, which is a key component in pricing derivatives and other financial instruments. By assessing trade-level determinants, it provides insight into how a specific trade's exposure alters the existing credit risk profile. This detailed understanding of the trade's impact on credit risk allows institutions to make more informed decisions regarding risk management and capital allocation. Hence, marginal CVA is essential in understanding the nuances of credit risk on a per-trade basis rather than in aggregate, making the option regarding trade-level determinants the most accurate choice for what primary element marginal CVA assesses.