A corporate borrower ended into an interest rate swap with a money center bank last year. Interest rates have moved fortuitously in the borrower's favor. The fair value of the swap is now $2,625,000 in the money for the borrower.

Market: The money center bank has an approximate implied probability of default of eighty-seven basis points (87bp), derived from market-based products such as the bank's corporate bonds and Credit Default Swaps (CDS).

1. Suggest an accounting or booking-keeping adjustment the corporate borrower should make to the fair value of the derivative before recognizing a mark to market gain on the swap.

1. Briefly describe the term XVA and how it applies to derivatives.

1. In practical terms, why may it be more difficult calculating a derivative's credit riskiness than determining the credit riskiness on a loan or a bond?

Answer rating: 100% (QA)

Before recognizing a marktomarket gain on the swap the corporate borrower should make an accounting adjustment to reflect the credit risk of the money ... View the full answer