CVA — Credit Valuation Adjustment
Computes the CVA (Credit Valuation Adjustment), the discount applied to a derivative's value to reflect the risk of the counterparty defaulting. After the 2008 crisis, it became central to pricing: the market value of a swap or option is no longer the risk-free theoretical one, but that value minus the CVA. The calculation sums, period by period, the expected exposure times the default probability, discounted to present value and adjusted by the loss given default. Enter the expected exposures, the hazard rate, the recovery and the discount.
Result
—
CVA — Credit Valuation Adjustment
Computes the CVA (Credit Valuation Adjustment), the discount applied to a derivative's value to reflect the risk of the counterparty defaulting. After the 2008 crisis, it became central to pricing: the market value of a swap or option is no longer the risk-free theoretical one, but that value minus the CVA. The calculation sums, period by period, the expected exposure times the default probability, discounted to present value and adjusted by the loss given default. Enter the expected exposures, the hazard rate, the recovery and the discount.
The price of the counterparty failing
Before 2008, banks priced derivatives as if the counterparty would always pay. The crisis shattered that illusion. Today, the market value of a swap or an over-the-counter option is the risk-free theoretical value minus the CVA, the adjustment that explicitly charges for the possibility the other side defaults before honoring the contract.
The calculation sweeps the contract's life period by period. In each, it estimates the expected exposure, that is, how much would be lost if default occurred there, multiplies by the probability of default in that interval and discounts to present value. The sum of all those pieces, adjusted by the loss given default, which discounts the recoverable fraction, is the CVA.
Enter the expected exposures per period, the counterparty's hazard rate, the recovery rate and the discount rate. The tool returns the CVA. It's the foundation of a whole family of adjustments, the so-called XVA, that now permeate the derivatives desk and have made credit risk management an inseparable part of pricing.
Related Tools
DVA — Debit Valuation Adjustment
Computes the DVA (Debit Valuation Adjustment), the mirror image of CVA seen from the other side. While CVA discounts value for the risk of the counterparty failing, DVA recognizes the counterintuitive benefit of the institution's own default risk: if it might not pay its obligations, that effectively reduces the liability. It's the piece that makes derivative pricing symmetric between the two parties. The calculation follows the same structure as CVA, but uses the expected negative exposure and the own default probability. Enter the exposure and credit data.
CDS Par Spread (Reduced-Form)
Computes the par (breakeven) spread of a Credit Default Swap in the reduced-form model with a constant hazard rate, setting the present value of the protection leg — which pays 1−R on default — equal to that of the premium leg. It shows the credit-triangle relationship s ≈ (1−R)·λ in practice. Enter the hazard rate, recovery rate, maturity, payment frequency and risk-free rate; the result is in basis points.
Spread Duration (Numerical)
Computes the spread duration of a bond by finite differences, repricing the instrument for an up and a down move in the credit spread: (V− − V+)/(2·V0·Δs). While duration measures sensitivity to changes in the risk-free rate, spread duration isolates sensitivity to the credit spread, the premium the market charges for issuer risk. It's essential for managing credit portfolios, where spread risk often dominates. Enter the base price, the prices with higher and lower spread and the spread change used.
The results provided by this tool are for general informational and educational purposes only and do not constitute professional, financial, medical, legal, tax or accounting advice. Always confirm important decisions with a qualified professional and official sources.