CVA Calculation for Risky Bond (Solved Example) (FRM Part 2, Book 2, Credit Risk)

[finRGB]

Learning Objective: Calculate CVA and CVA as a spread with no wrong-way risk, netting, or collateralization.

[JIMMYMANIAR]

difficult concept explained with a simple example. Great stuff!

[monikadixit]

simplistic way of explaining this topic.

[sergeykaverin]

Please, explain the Probability_Default calculation.
In general, Probability_Default = 1 - Survival_Probability. It means for 1-year period Survival_Probability = 1 - Probability_Default = 1 - 0.02 = 0, 98
For the second period we have to use Probability_Default_2 = 1 - Survival_Probability_2 = 1 - Survival_Probability^2 = 1 - 0, 98^2 = 0, 0396. Means 3, 96%
And it makes sense: it is harder to survive for a long period.
But in your video (timecode 5:54) - the longer we live - the default is more rare

[lucianturcu]

Do you know this type of problem is used also at the PRMIA CCRM exam?

[ncx]

hey thanks for the great video.however am finding it but hard to understand the concept of Risky Value? why by taking out the CVA portion (which is the present value of expected future loss) from fair value of bond discounted at risk-free, why do we get a risky value? can you please help elaborate on this part?

[moustafayounes]

How did you arrive to CVA 3, 6554? I used the formula you have shown and took the sum of DF (2, 77513) * EE (max =115, 54) * PD ( 0, 0588) = 18, 86 divided by 3 years = 6, 29 multiplied by LGD of 0, 6= CVA 3, 7714.

[rishabhshukla]

How do you arrived at 111.1004?Please if you can explain the concept without direct use of calculator..

[lucianturcu]

how was calculated credit spread? from Risky value?

[nashrahsafdar]

We calculate CVA for derivative transactions, why are we calculating it here for a Bond?