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 TRM, Calculating CVA/DVA for Netting Groups (EE Method)

 

For the calculation of CVA and DVA for netting groups, you can also use the calculation method Based on Expected Exposures. With this method, the system calculates the risk-free NPV on the basis of the risk-free yield curve that is assigned in the relevant evaluation type for the transactions of the netting group.

Firstly, the system calculates the CVA and DVA separately for the netting group. The expected exposures (EEs) of the transactions of the netting group (NG) for a set of future dates are either calculated and aggregated for each date for the EENG or, in the case of manual entries, read from the EE table. The expected exposures are then weighted with the product of default probability (AWKT) and loss given default (LGD).

Using allocation, the system distributes the CVA and the DVA of the netting group across the transactions of the netting group, and stores the results in the NPV table.

Technical Details

Technical Name of the Product Feature

TRM_CVA_EE_NG

The product feature is

New

Country Dependency

Valid for all countries

Software Component Version

EA-FINSERV 617

Application Component

FIN-FSCM-TRM-MR

Available as of

SAP enhancement package 7 (Support Package 07) for SAP ERP 6.0

Prerequisite Business Functions

TRM, Credit and Debit Value Adjustments (FIN_TRM_CVA)

Additional Details

CVA and DVA values are calculated using the following equations:

where

  • LGD = loss given default

  • D = discount factor

  • t = time

  • EPE = expected positive exposure

  • ENE= expected negative exposure

  • AWKT = default probability

  • C in subscript = business partner

  • I in subscript = your own company

  • EPE and CVA are positive

  • ENE and DVA are negative

The calculation of credit and debit value adjustments requires the credit spread curve for the reference entity of either the business partner or of your own company in order to obtain the product AWKT*LGD as follows:

LGD*AWKT (ti-1, ti) = CS (ti)*(ti - t0) - CS (ti-1)*(ti-1 - t0)

See also: Deriving Credit Spread Curves

The calculation produces the CVANG and the DVANG.

Using allocation, the system distributes the CVA and the DVA of the netting group across the individual transactions of the netting group. (This produces for each transaction of the netting group the CVAEG and the DVAEG respectively.)

The relevant NPV of the transactions of the netting group is obtained using the following equation:

Risk-free NPVEG - CVAEG - DVAEG = NPVEG

The results are stored at transaction level in the NPV table. By choosing the CVA/DVA Calculation pushbutton, you can also display the results for the netting group in the NPV table.

Effects on Existing Data

You calculate NPVs with inclusion of CVA and DVA by using the function Determine NPVs Including CVA and DVA (transaction TPM60CVA).

The system performs the calculation in the currency that you specify in the function. If you do not specify a currency, the system calculates the expected exposures as well as CVANG/DVANG in the currency of the netting group. After the results have been saved in the NPV table, the final, post-allocation results for each transaction are translated into the position currencies of that transaction.

The results at the level of the financial transactions are stored in the NPV table (table VTVBAR, transaction JBNPV).

Effects on Customizing

See also: Credit and Debit Value Adjustments: Customizing

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