The effect of self-default on the valuation of liabilities and derivatives
(DVA) has been widely discussed but the effect on assets has not received
similar attention. Any asset whose value depends on the status, or existence,
of the firm will have a DVA. We extend (Burgard and Kjaer 2011) to provide a
hedging strategy for such assets and provide an in-depth example from the
balance sheet (Goodwill). We calibrate our model to seven US banks over the
crisis period of mid-2007 to 2011. This suggests that their reported profits
would have changed significantly if DVA on assets, as well as liabilities, was
included - unless the DVA was hedged.Comment: 16 pages, 4 figure
