Credit Valuation Adjustment

Definition ∞ Credit Valuation Adjustment (CVA) is a deduction from the fair value of a derivative instrument, accounting for the expected loss due to the counterparty’s potential default. It quantifies the credit risk inherent in over-the-counter financial contracts. While primarily a concept in traditional finance, the principles of CVA are becoming relevant in sophisticated digital asset derivatives markets. This adjustment helps in accurately pricing instruments and managing exposure.
Context ∞ The application of Credit Valuation Adjustment in digital asset markets is a topic gaining traction in financial news, particularly as institutional participation grows. Calculating CVA for crypto derivatives presents unique challenges due to market volatility and the nascent regulatory environment. Establishing standardized methodologies for CVA in this sector is a key area of development for risk management and financial reporting.