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  • The Valuation of Financial Derivatives Subject to Counterparty Risk and Credit Value Adjustment

    Author(s):
    Tim Xiao (see profile)
    Date:
    2020
    Group(s):
    Business Management
    Subject(s):
    Economics
    Item Type:
    Article
    Tag(s):
    credit value adjustment (CVA), credit risk modeling, financial derivative valuation, collateralization, margin and netting.
    Permanent URL:
    http://dx.doi.org/10.17613/h2h4-eg12
    Abstract:
    This article presents a generic model for pricing financial derivatives subject to counterparty credit risk. Both unilateral and bilateral types of credit risks are considered. Our study shows that credit risk should be modeled as American style options in most cases, which require a backward induction valuation. To correct a common mistake in the literature, we emphasize that the market value of a defaultable derivative is actually a risky value rather than a risk-free value. Credit value adjustment (CVA) is also elaborated. A practical framework is developed for pricing defaultable derivatives and calculating their CVAs at a portfolio level.
    Metadata:
    xml
    Status:
    Published
    Last Updated:
    3 years ago
    License:
    All-Rights-Granted

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    Item Name: pdf derivativecva-13-data.pdf
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    Activity: Downloads: 273

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