LOCAL COMPANY, A FREQUENT USER OF SWAPS, OFTEN ENTERS INTO TRANSACT...

9.

Local Company, a frequent user of swaps, often enters into transactions with Global Bank, a major provider of

swaps. Recently, Global Bank was downgraded from a rating of AA+ to a rating of A, while Local Company

was downgraded from a rating of A to a rating of A-. During this time, the credit spread for Global Bank has

increased from 20 bps to 150 bps, while the credit spread for Local Company has increased from 130 bps to

170 bps. Which of the following is the most likely action that the counterparties will request on their credit

value adjustment (CVA)?

a.

The credit qualities of the counterparties have migrated, but not significantly enough to justify amending

existing CVA arrangements.

b.

Global Bank requests an increase in the CVA charge it receives.

c.

Local Company requests a reduction in the CVA charge it pays.

d.

CVA is no longer a relevant factor, and the counterparties should migrate to using other mitigants of

counterparty risk.

2015 Financial Risk Manager (FRM®) Practice Exam