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Function documentationDetermine NPVs Including CVA and DVA

 

You use this function to include credit und debit value adjustments in the calculation of NPVs for individual financial transactions or for netting groups.

Integration

This function is delivered in addition to the function Determine Net Present Values (transaction TPM60).

The results of the calculation are stored in the NPV table at the level of the financial transactions, and you can display the results using the function Maintain NPV (transaction JBNPV).

See also: Overview: Calculating NPVs in TRM

Prerequisites

  • Market Data

    The required current market data, such as exchange rates, interest rates, and credit spread values, must be available in the system.

Features

  • Using this function, you can include credit and debit value adjustments in the calculation of the NPVs for financial transactions and then save the NPVs in the NPV table.

    You use the credit and debit value adjustment type to control how the system calculates the risk-based NPV as well as the CVA and DVA values.

    • If you have opted to use the Difference Method, the system applies the settings in the evaluation type to calculate the risk-based NPV and the risk-free NPV in exactly the same way as in the function Determine Net Present Values (transaction TPM60).

      The risk-based NPV is determined using a yield curve matching the yield curve type assigned in the evaluation type settings on the Market Data Categories tab in the Yield Curve Types area. Credit spread curves are applied.

      The risk-free NPV is determined using a risk-free yield curve matching the yield curve type assigned in the evaluation type settings on the Market Data Categories tab in the Risk-Free Yield Curve Types area.

      Note Note

      If you have assigned basis spread curves, the system applies them in the calcuation of the risk-free NPV as well as the risk-based NPV.

      End of the note.

      In addition, the CVA or DVA is determined as the difference between both values and is also stored in the NPV table.

    • If you have opted to use the Based on Expected Exposures method, the risk-free NPV is calculated using the risk-free yield curve derived from the evaluation type. CVA and DVA values are calculated using the expected exposures. The (risk-based) NPV is calculated using the following equation:

      NPV = risk-free NPV – CVA – DVA

    See also: Credit and Debit Value Adjustments

  • The results of the calculation are stored in the NPV table. Since the results are stored in the NPV table at the level of the financial transactions, allocation needs to be used to divide the netting group results across the financial transactions of the netting group. In the NPV table, you can use the CVA/DVA Calculation pushbutton to navigate to the results of the related netting group.

Activities

  1. Call the function Determine NPVs Including CVA and DVA (transaction TPM60CVA) in the application menu of the Treasury and Risk Management under Start of the navigation path Transaction Manager Next navigation step Money Market/Foreign Exchange/Derivatives/Commodities Next navigation step Accounting Next navigation step Valuation End of the navigation path or under Start of the navigation path Financial Risk Management for Commodities Next navigation step Accounting Next navigation step Valuation End of the navigation path.

  2. First specify whether you want to perform the calculation for netting groups or single transactions.

  3. Make the following settings to select the financial transactions for which you want to perform the calculation.

  4. Under Evaluation Parameters, make the following entries:

    • Calculation Date

    • CVA/DVA Type

    • Evaluation Type

    • Currency

      • If you specify a currency, all values for single transactions and netting groups are calculated in this currency, and the intermediate results and final results are stored in this currency.

      • If you do not specify a currency, the calculation is made for single transactions in the position currency and for netting groups in the netting group currency. When the results are saved in the NPV table, the final results are translated into the position currencies of the relevant transactions, including the final results for transactions that form part of the netting group. The system calculates the intermediate results (EE, CVANG/DVANG) in the netting group currency only.

    • Clean Price Calculation indicator

      In addition to the NPV, the system calculates the clean price for the financial transaction (in the case of money market transactions or swaps).

    • Intrinsic Value Calculation indicator

      In addition to the NPV, the system calculates the intrinsic value and the time value of the financial transaction (in the case of OTC options).

    • Separate NPV (In/Out) indicator

  5. In the Hedge area, you decide whether you want to run the program in the test run mode. In the Price/NPV Type field, you specify the price/NPV type with which the results are stored in the NPV table.

    Furthermore, you specify whether the system also stores results with warnings, and whether a detailed log is created and, if so, whether it is stored.

  6. In the Layout area, you can specify for the output screens a layout variant that you have defined.

  7. Run the program.

Results List

The results list contains the calculation results for all processed financial transactions and displays them as they are stored in the NPV table. In the case of financial transactions belonging to a netting group, this list also displays the relevant netting group.

When you select a line and choose the CVA/DVA Key Figures pushbutton, you navigate to the calculation details. If the selected financial transaction belongs to a netting group, the results for that netting group are displayed in the first line.

By choosing the Expected Exposures pushbutton, you can display the expected exposures used as the basis for the calculation.