Lecture_7_CVA_201820180402201111

CVA
General Framework
Risk Free vs Substitution Close-out
Unilateral case:
Theclose-outamountisthe netpresentvalueoftheresidualdeal,calculatedas
a risk-free quantity, since the surviving counterparty is assumed to be defaultfree.
Bilateral case:
The close-out amount is the net present value of the residual deal, calculated
by taking into account the risk of default of the survived party. It is called
substitution close-out and can give rise to contagion effects.
See Brigo and Morini (2010).
Paola Mosconi 20541 – Lecture 10-11 26 / 86