The valuation of counterparty credit risk via credit value adjustment (CVA) has long been a consideration for banks, especially those with large over‐the‐counter (OTC) derivatives positions. The global financial crisis has increased the significance of counterparty risk and CVA as credit markets have become extremely turbulent.
Given all the importance of CVA, something that is particularly surprising is that it is not very well‐defined as a quantity and can differ significantly across institutions. This refers to both mathematical definitions and practical parameterisation and implementation.
This paper aims to define the differences in CVA approaches between institutions and also within the same institution. We explain how future accounting and regulatory requirements are likely to create a convergence but also highlight aspects that will create on‐going divergence.