A bank with a USD 7 million receivable and a USD 5 million payable to the same counterparty may face either USD 7 million or USD 2 million of positive exposure. The difference is the enforceable settlement agreement, not a change in market prices. This lesson derives the aggregation rule behind portfolio CVA, shows why trade-level adjustments cannot simply be added, and explains how netting affects implementation and allocation.
Learning objectives. By the end of this note you should be able to:
- aggregate clean values within a specified netting set before taking positive parts;
- prove the exposure benefit of netting under matched assumptions;
- distinguish gross, netted and collateralised exposure;
- calculate marginal CVA and explain why it can be negative.
In this lesson
- The agreement determines the unit of calculation
- Prove the exposure bound
- Joint scenarios matter
- Netting is not collateral
- Marginal CVA and trade decisions
- Implementation checks
Before you start
The full lesson, with worked examples and exercise solutions, is for members.
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