PRMIA 8010 Exam - Topic 1 Question 16 Discussion

Actual exam question for PRMIA's 8010 exam

Question #: 16
Topic #: 1

[All 8010 Questions]

Which of the following formulae describes CVA (Credit Valuation Adjustment)? All acronyms have their usual meanings (LGD=Loss Given Default, ENE=Expected Negative Exposure, EE=Expected Exposure, PD=Probability of Default, EPE=Expected Positive Exposure, PFE=Potential Future Exposure)

ALGD * ENE * PD

BLGD * EPE * PD

CLGD * EE * PD

DLGD * PFE * PD

Show Suggested Answer

Suggested Answer: B

The correct definition of CVA is LGD * EPE * PD. All other answers are incorrect.

CVA reflects the adjustment for counterparty default on derivative and other trading book transactions. This reflects the credit charge, that neeeds to be reduced from the expected value of the transaction to determine its true value. It is calculated as a product of the loss given default, the probability of default and the average weighted exposure of future EPEs across the time horizon for the transaction.

The future exposures need to be discounted to the present, and occasionally the equations for CVA will state that explicitly. Similarly, in some more advanced dynamic models the correlation between EPE and PD is also accounted for. The conceptual ideal though remains the same: CVA=LGD*EPE*PD.

by Hoa at Aug 01, 2022, 08:54 PM

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Phillip

4 months ago

I doubt it's just LGD and PD; there must be more to it.

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Gerald

4 months ago

Wait, is it really that simple?

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France

4 months ago

Nah, I believe it's option D.

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Glen

5 months ago

I think it's definitely option B!

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Maurine

5 months ago

CVA is usually calculated using LGD, PD, and some exposure measure.

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Nada

5 months ago

I’m leaning towards option D, LGD * PFE * PD, since it seems to cover the potential future exposure aspect, but I’m not entirely confident.

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Cory

5 months ago

I feel like I should know this, but I can't recall if it's EE or EPE that we use in the context of CVA.

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Ria

5 months ago

I remember practicing a similar question, and I think it might be LGD * EPE * PD, but I could be mixing it up with something else.

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Darnell

5 months ago

I think CVA is related to the potential losses from counterparty defaults, but I'm not sure which formula fits best.

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Van

5 months ago

I’m confused about the differences between EE and EPE. I think it might be option C, but I’m not confident.

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Margurite

5 months ago

I practiced a similar question, and I feel like the formula involves expected negative exposure. So, maybe option A?

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Kallie

5 months ago

I'm not entirely sure, but I remember something about expected exposure being important. Could it be option B?

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Bok

5 months ago

I think CVA is related to the potential exposure, so maybe it's option D with LGD * PFE * PD?

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Isadora

5 months ago

Okay, let's see. I'm pretty confident I know the answer, but I'll double-check the options just to be sure.

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Fanny

5 months ago

Okay, I think I've got this. Let me walk through it step-by-step - 3 new logical files, 2 modified logical files, and 1 eliminated logical file. With average complexity, that should give me the answer.

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Albina

5 months ago

This question seems straightforward. I'll focus on identifying the direct benefits of CSA and then determine which one is not a direct benefit.

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