Most of this book is concerned with determining the no-default value of derivatives, that is, the value assuming that neither of the two sides will default. CVA and DVA are adjustments to the no-default value reflecting the possibility of a default by one of the two sides. Here we provide an overview of them. More details on their calculation are in Chapter 24.

Suppose that a bank and a counterparty have entered into a portfolio of derivative transactions that are cleared bilaterally. The master agreement between the bank and the counterparty will almost certainly state that netting applies. This means that all outstanding derivatives between the two sides are considered as a single derivative in the event of a default. When ...

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