Question
A trader needs to estimate the CVA on a swap. The exposure management group comes up with an EPE of $6 million. With the collateral,
A trader needs to estimate the CVA on a swap. The exposure management group comes up with an EPE of $6 million. With the collateral, the recovery rate of the firm is 60%. The discount factor is 0.9. The probability of default (PD) of the counterparty is 2%. The management group funds that the collateral's PD is positively associated with the PD of the counterparty. EE considering this association is $7 million. What is the risk the association refers to and what is the CVA considering this risk?
A. Wrong-way Risk; 0.0504 m
B. Right-way Risk; 0.0504 m
C. Wrong-way Risk; 0.0432 m
D. Right-way Risk; 0.0432 m
Step by Step Solution
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Step: 1
ANSWER B is the correct option because it is positive...
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Intermediate Accounting
Authors: Donald E. Kieso, Jerry J. Weygandt, And Terry D. Warfield
13th Edition
9780470374948, 470423684, 470374942, 978-0470423684
