A CVA desk hedges changes in the counterparty's credit spread with the counterparty's CDS and similar instruments, and changes in exposure driven by market factors with futures, swaps, and options1. It also reviews collateral agreements, because exchanging variation margin and initial margin lowers the exposure and so the amount of CVA.

Consider a hypothetical example in which a counterparty's CVA is 4.44 million yen and rises to 8.88 million yen as its creditworthiness falls. If the CVA desk has hedged nothing, the increase of 4.44 million yen is a valuation loss. If it has hedged the credit-spread risk with CDS, that part is offset by the profit or loss on the CDS. What the hedge cannot offset remains.

Under the CVA risk framework that the Basel Committee finalized in December 2017, one of the minimum requirements for the standardized approach (SA-CVA) is to have a CVA desk, or a similar function, responsible for managing and hedging CVA risk12. A 2018 paper by the Bank of Japan's Institute for Monetary and Economic Studies notes that some CVA desks act as "xVA desks" that also manage funding, collateral, and the reduction of capital charges3.

Notes

  1. Soichi Maeda and Tatsuya Hasegawa, "ＣＶＡリスク計測の枠組みの見直し" (Review of the framework for measuring CVA risk), Kinzai Institute for Financial Affairs, Kinyu Zaisei Jijo (February 12, 2018 issue), "実務におけるＣＶＡ管理" (CVA management in practice) (page 33) and "標準的方式（ＳＡ－ＣＶＡ）" (standardized approach (SA-CVA)) (page 36) (in Japanese). ↩ ↩2

  2. Financial Services Agency and Bank of Japan, "「信用評価調整（CVA）リスクの最低所要自己資本」の概要" (Overview of "Minimum capital requirements for credit valuation adjustment (CVA) risk"), "５．標準的方式(SA-CVA)～主な要件①～" (5. Standardized approach (SA-CVA): main requirements (1)) (page 8) (in Japanese). ↩

  3. Takashi Kawakami, "ヘッジ取引におけるデリバティブ信用評価調整の影響についての考察" (A study of the effects of credit valuation adjustments of derivatives on hedging transactions), Kinyu Kenkyu, Institute for Monetary and Economic Studies, Bank of Japan (April 2018), Section 5, footnote 26 (pages 147–148) (in Japanese). ↩