Debit Valuation Adjustment
Also known as: Own Credit Adjustment, OCA
Debit Valuation Adjustment (DVA) represents the value of your own credit risk to counterparties. DVA measures the gain in derivative value if you default on your obligations—a benefit for your shareholders because creditors receive less than the full derivative value. DVA is controversial but now mandatory under IFRS 13 for fair value accounting.
Key highlights
- Accounting required: IFRS 13 mandates DVA adjustment for financial reporting
- Economic logic: reflects the benefit of being able to default at less than full obligation
- Hedging guide: DVA can be hedged via buying own CDS, locking in value
- Symmetry: complements CVA in bilateral valuation of derivatives
Intuition
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How it works
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When to use it
Use DVA when required by accounting standards (IFRS 13, US GAAP). Essential for fair value reporting of derivative portfolios. However, many managers hedge DVA to lock in stable valuations. DVA is most significant for institutions with significant leverage and poor credit quality.
Strengths & limitations
- Accounting required: IFRS 13 mandates DVA adjustment for financial reporting
- Economic logic: reflects the benefit of being able to default at less than full obligation
- Hedging guide: DVA can be hedged via buying own CDS, locking in value
- Symmetry: complements CVA in bilateral valuation of derivatives
- Philosophical controversy: banks profit from their own credit deterioration, which many find problematic
- Earnings volatility: DVA changes create non-economic P&L swings tied to credit spread moves rather than market moves
- Netting challenges: DVA is correlated with CVA in portfolios with both long and short positions; double-counting is subtle
- Hedging cost: hedging DVA (buying own CDS) can be expensive and may telegraph financial distress
Common pitfalls
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Applications
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Frequently asked
Why is DVA controversial?
DVA creates a paradox: banks gain value when their own credit deteriorates. After 2008, this seemed offensive—Lehman's shareholders suffered losses while DVA increased reported asset values. Economically sound, but politically and ethically problematic.
How does DVA relate to CVA?
CVA is counterparty risk loss. DVA is own credit risk gain. In a bilateral portfolio, CVA on receivables is offset by DVA on payables. Net XVA = CVA - DVA. When you owe money and default, counterparty loses; when counterparty owes and defaults, you lose.
Should I hedge DVA?
Many institutions do. Buying own CDS hedges DVA: if your credit deteriorates (DVA worsens), CDS gains offset the loss. Hedge cost depends on credit quality. High-quality firms rarely hedge DVA; troubled firms often do to stabilize earnings.
What is the relationship between DVA and funding costs?
Funding Value Adjustment (FVA) captures the cost of funding derivative positions. DVA is related: if you fund derivatives by issuing debt at your credit spread, the spread captures both counterparty risk (CVA) and funding cost. Separating FVA from DVA requires careful analysis.
Sources
- 1.Gregory, J. (2009). Counterparty Credit Risk: The New Challenge for Global Financial Markets. John Wiley & Sons.
- 2.Burgard, C., & Kjaer, M. (2011). Partial differential equation representations of derivatives with counterparty risk and funding costs. Journal of Credit Risk, 7(3), 1-19.
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Cite this page
ScholarGate. (2026, June 3). Debit Valuation Adjustment. ScholarGate. https://scholargate.app/quantitative-finance/debit-valuation-adjustment