Show TOC

Background documentationDerive Credit Spread Curves for CVA/DVA Calculation

 

For outgoing payments, the credit spread curve for your own company is used, whereas, for incoming payments, the credit spread curve of your business partner is used. Credit spread curves are derived using the reference entities. The system only considers reference entities for which the Use in Curves indicator has been set.

Determining Reference Entities

The system determines the reference entity for your own companies separately from that for business partners. In both cases, there is a standard derivation logic that you can replace using your own implementations of the BAdIs BAdI: Derive Reference Entity for Your Own Companies sowie BAdI: Derive Reference Entity for Business Partners. For this, the system first determines the derivation IDs that are assigned in the relevant evaluation type/valuation rule for derivation of the reference entities.

  • Reference Entities for Your Own Company

    The standard implementation first searches for a reference entity for the company code of the transaction. If a reference entity is found for that company code, the system searches for a reference entity for the company code entered in the evaluation type/valuation rule.

  • Reference Entity for Your Business Partner (in the Counterparty role)

    The standard implementation first checks the settings that you have made in the evaluation type/valuation rule on the Evaluation Control tab in the Credit Spread Curve Derivation area.

    • If you have not made an entry in the Business Partner Relationship Category field, the system searches for a reference entity for the business partner of the transaction.

    • If you have specified a relationship category in the Business Partner Relationship Category field, the system first determines which business partner is connected to business parter by means of this relationship category, and it then searches for the reference entity for that connected business partner. You can use the relationship category, for example, to valuate a business partner using the credit spread of the parent group. In this case, you would choose, in the evaluation type/valuation rule, the relationship category that is assigned to a subsidiary.

      If the business partner stored in the business partner master data is not connected to another business partner by means of this relationship category, the system determines the reference entity for the business partner of the transaction.

    If the system does not find any reference entities for the business partners determined in this way, it searches in the assignment table Geschäftspartner zu Referenzeinheiten zuordnen (transaction RMBPRE_ASSIGN) for reference entity that is assigned to the business partner.

Determining the Credit Spread Curve

The credit spread curve results from the credit spread curve structure assigned to the reference entity determined and from the designation "Bid" versus "Ask".