Credit Risk Management Practice Exam

Disable ads (and more) with a membership for a one time $2.99 payment

Prepare for the Credit Risk Management Exam. Enhance your skills with flashcards, detailed explanations, and a comprehensive quiz format designed for effective learning. Achieve exam readiness!

Each practice test/flash card set has 50 randomly selected questions from a bank of over 500. You'll get a new set of questions each time!

Practice this question and more.

Which of the following equations correctly represents the relationship between BCVA, CVA, and DVA?

BCVA = CVA + DVA
BCVA = CVA - DVA
BCVA = CVA × DVA
BCVA = CVA / DVA

The correct answer is: BCVA = CVA + DVA

The correct representation of the relationship between Basis Credit Valuation Adjustment (BCVA), Credit Valuation Adjustment (CVA), and Debit Valuation Adjustment (DVA) is effectively captured by the equation BCVA = CVA + DVA. This relationship reflects how BCVA accounts for both the counterparty credit risk (CVA) and the entity's own credit risk (DVA). CVA measures the risk of loss due to the counterparty defaulting on their obligations. Conversely, DVA measures the potential gain or loss to the entity if its own credit quality deteriorates. By adding CVA and DVA, BCVA provides a comprehensive assessment of the overall credit risk exposure that takes into account both sides of the credit relationship. This holistic view is essential in credit risk management, as it helps organizations to factor in both potential losses from counterparty defaults and the impacts on their own credit position. Understanding the interplay between these components is crucial for effective risk measurement and management strategies in financial contexts.