Gaining from your own default - counterparty credit risk and DVA
A trend that has become increasingly relevant for financial institutions to consider is the bilateral nature of counterparty risk. This involves quantifying counterparty risk under the assumption of one’s own default where a defaulting institution “gains” on any outstanding liabilities that need not (cannot) be paid in full. This component is often named DVA (Debit Valuation Adjustment) and is the mirror image of the more commonly known unilateral CVA (Credit Valuation Adjustment).
This InteDelta Thought Leadership paper investigates some of the major issues financial institutions are facing in considering DVA.