Lecture_7_CVA_201820180402201111

CVA
Unilateral CVA
Unilateral CVA – Cash flows
Cash flows are given by:
1 if default comes after final maturity τ > T, the original payoff:
+ 1 {τ>T} Π(t,T)
2 if default occurs before maturity τ < T:
1 the payments due before default:
+ 1 {τ≤T} Π(t,τ)
2 the recovery of the residual net present value at default, if positive:
+ 1 {τ≤T} RecD(t,τ) (E τ[Π(τ,T)]) +
3 minus the total residual net present value at default, if negative:
− 1 {τ≤T} D(t,τ) (−E τ[Π(τ,T)]) +
Paola Mosconi 20541 – Lecture 10-11 30 / 86