xVA — CVA on IRS — Derivatives Insights

xVA · Credit Valuation Adjustment

5-step pipeline: zero curve → forwards → cashflows + MTM(t) → expected exposure → trapezoidal sum. CVA = (1 − R) · Σ EE̅(tᵢ₋₁, tᵢ) · DF(0, tᵢ) · PD(tᵢ₋₁, tᵢ). Pedagogical simplifications: deterministic curve, flat hazard rate, no WWR, no netting, no collateral.

CVA parameters

K = 0.39% · T = 1y · dt = 0.25y · λ_ctp = 3.00% · R = 40.00%. Single-trade, no netting, no collateral.

Preset

Swap parameters

Fixed rate (K)

= 0.39%

Notional (€)

Zero curve r(t_i)

r(T1) = r(0.25y)

= 0.04%

r(T2) = r(0.50y)

= 0.25%

r(T3) = r(0.75y)

= 0.32%

r(T4) = r(1.00y)

= 0.40%

Counterparty credit

λ counterparty (hazard rate)

= 3.00%

Recovery rate

= 40.00%

Mode

Running the 5-step CVA pipeline…

Zero curve & forwards

The input zero curve r(t) and the no-arbitrage forwards f(t) derived from it. Steeper or flatter curves drive how MTM(t) evolves.

Computing…

MTM(t) & Expected Exposure

MTM(t) = residual NPV of remaining cashflows. EE = max(MTM, 0) — the slice the counterparty can default on.

Computing…

Interview Q&A — xVA & counterparty credit

Hazard rates, CVA mechanics, the DVA paradox, what wrong-way risk actually means at a desk level.

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