Credit Risk Management Practice Exam

Which of the following is true about positive BCVA?

1. The counterparty has a higher chance of default

2. The counterparty may receive CVA fees

3. The counterparty faces liquidity constraints

4. The counterparty has higher expected loss

The correct answer is: The counterparty may receive CVA fees

Positive Credit Valuation Adjustment (BCVA) indicates that the counterparty is in a favorable position regarding credit exposure. When BCVA is positive, it suggests that the market value of the deal is beneficial for the counterparty, leading to the possibility of receiving CVA fees. This is a reflection of the potential gains or benefits the counterparty might attain due to favorable credit terms or market conditions. Positive BCVA means that, from the perspective of the counterparty, the expected exposure is greater than the expected loss in case of default. In finance, CVA fees can be charged for the risk of counterparty default, and a positive BCVA suggests that the counterparty can negotiate terms that might include such fees. The other options do not accurately represent the implications of a positive BCVA. The idea that higher chances of default, liquidity constraints, or elevated expected losses can be associated with a positive BCVA is misleading, as these factors generally correlate with a negative or neutral valuation adjustment. Therefore, the correct understanding of positive BCVA directly leads to the conclusion that it presents an opportunity for the counterparty to receive CVA fees.