The XVA section adds counterparty and funding effects to an otherwise clean derivative value. CVA is the expected loss from counterparty default on positive exposure; FVA captures the funding cost of carrying an uncollateralized position. The exact decomposition depends on collateral, netting, and the institution's convention.
\nThe calculation is path dependent: simulate or approximate future exposure, combine it with default probabilities and recovery, and discount the expected loss. Netting sets and collateral agreements can change the exposure more than a small shift in a market input.
\nThe class notes use XVA to connect pricing and risk governance. A model output is meaningful only when the legal agreement and the exposure definition are the same ones used by the desk.
","contentMarkdown":"The XVA section adds counterparty and funding effects to an otherwise clean derivative value. CVA is the expected loss from counterparty default on positive exposure; FVA captures the funding cost of carrying an uncollateralized position. The exact decomposition depends on collateral, netting, and the institution's convention.\n\nThe calculation is path dependent: simulate or approximate future exposure, combine it with default probabilities and recovery, and discount the expected loss. Netting sets and collateral agreements can change the exposure more than a small shift in a market input.\n\nThe class notes use XVA to connect pricing and risk governance. A model output is meaningful only when the legal agreement and the exposure definition are the same ones used by the desk.","dataUrl":"https://sharifhsn.dev/api/posts/xva-and-counterparty-risk.json","date":"2025-04-21","datePublished":"2025-04-21","description":"The XVA section adds counterparty and funding effects to an otherwise clean derivative value. CVA is the expected loss from counterparty default on positive exposure; FVA captures …","site":"https://sharifhsn.dev","slug":"xva-and-counterparty-risk","source":"FE-635 | Risk Engineering","sourceUrl":null,"tags":["FX","XVA","Counterparty Risk"],"title":"XVA and Counterparty Risk","url":"https://sharifhsn.dev/blog/xva-and-counterparty-risk/","version":"1","wordCount":119}