You are entering into a swap as a fixed rate receiver with Party A and into an offsetting position with party B. All other things being equal, which of the scenarios below will lead to the greatest increase in the sum of the Credit Value Adjustments for A and B?
A) upward shift of the swap curve and rating downgrade of party A
B) downward shift of the swap curve and rating downgrade of party A
C) downward shift of the swap curve and rating downgrade of party B
D) downward shift of the swap curve only

Question

Quizplus · Accepted Answer

When there is a downward shift in the swap curve, it increases the market value of the fixed rate receiver position held by Party A, which in turn increases the Credit Value Adjustment (CVA) for Party A. Similarly, the offsetting position held by Party B also increases in value with the downward shift, resulting in an increase in their CVA. A rating downgrade of Party A would further increase their CVA, but since the offsetting position with Party B will also be impacted by the same downgrade, the net effect on the sum of CVAs will not be as significant as the impact of a downward shift in the swap curve. Therefore, option B would lead to the greatest increase in the sum of CVAs for both parties.

You Are Entering into a Swap as a Fixed Rate