Lecture_7_CVA_201820180402201111

CVA
General Framework
CVA Definition 1: Bilateral Case
Analogously,In thebilateralcase,the riskyvalue ofthe derivativetakesintoaccount
both the default of the counterparty C and that of the investor I:
E t [Π D (t,T)] = V(t)
}{{}
risk-free
[
−LGDC E t 1 {τC ≤T,τ C ≤τ I }D(t,τ C ) (V(τ C )) +]
} {{ }
CVA
[
+LGDI E t 1 {τI ≤T,τ I ≤τ C }D(t,τ I ) (−V(τ I )) +]
} {{ }
DVA
(3)
The formula is symmetric: the investor’s DVA is equal to the counterparty’s CVA,
but an investor cannot hedge its DVA spread risk by selling CDS protection on
itself.
Paola Mosconi 20541 – Lecture 10-11 22 / 86