# LO 32.7: Calculate the DYA and explain how stressing DVA enters into

LO 32.7: Calculate the DYA and explain how stressing DVA enters into aggregating stress tests o f CCR.
Financial institutions should include the liability effects in their stress calculations to properly calculate the CVA profit and loss. As a result, institutions could adequately incorporate the value of their option to default to a counterparty through the bilateral CVA. This component is often called the debt value adjustment (DVA).
The BCVA formula is similar to the CVA formula with two differences. First, BCVA incorporates negative expected exposure (NEE), which is calculated from the counterpartys perspective. Second, the option that the financial institution can default on its counterparty is dependent on the counterparty surviving first; therefore, the probability of the counterpartys survival must be included in the BCVA formula (we denote this as Sp with /representing the financial institution). This change must also be reflected in the CVA formula. The BCVA formula can therefore be set up as:
b c v a = +y l g d * x y e e ; (tj) x p d ; (tH . tj) x s; (t H)
N
T – y l g d ; x y n e e ; (tj) x p d ; (t h , tj) x s; (t H) N T N n=l T j= l
n1
j= l
The probability of survival depends on credit default swap (CDS) spreads, and the losses depend on the financial institutions own credit spread. Institutions should be aware that this may result in counterintuitive results, for example, implying that losses occur because the institutions credit quality has improved. In any case, the financial institution should consider stress results for the BCVA and calculate stress losses by subtracting the current BCVA from the stressed BCVA.
The benefit of incorporating BCVA is that it allows CCR to be treated as market risk, which enables CCR to be included in market risk stress testing consistently. Any gains or losses from the BCVA stress could then be added to the institutions stress tests from market risk.
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Topic 32 Cross Reference to GARP Assigned Reading – Siddique and Hasan, Chapter 4
S h o r t c o m i n g s o f S t r e s s T e s t i n g CCR