In derivatives markets, Counterparty Credit Risk (CCR) represents the risk that a counterparty defaults while a bilateral contract has a positive market value for the remaining party.

CVA is an accounting adjustment that prices counterparty credit risk directly into the fair value evaluation of a derivatives portfolio. It represents the difference between the risk-free value of a contract portfolio and the true, risk-adjusted value after accounting for potential counterparty defaults:

CVA = Risk Free Valuation - Counterparty Risk Adjusted Valuation

By calculating CVA in real time, trading desks can accurately price the risk of default into their transactions, preventing unexpected financial hits if a major trading partner faces a sudden credit downgrade.