FRM Glossary · Part II · Credit Risk

Credit Valuation Adjustment (CVA)

The market value of the expected loss on a counterparty due to its potential default — subtracted from the unadjusted derivative value.

In more detail

CVA adjusts the risk-free price of a derivative for the expected loss from counterparty default. It is computed as the discounted expected exposure multiplied by the counterparty's default probability. Banks manage CVA through netting, collateral (CSA), and hedging with CDS. Wrong-way risk — where exposure and counterparty default probability are positively correlated — can dramatically increase CVA.