Derivative Valuation Framework

Derivatives valuation bears counterparty credit risk and requires credit valuation adjustment (CVA). This article presents a framework for pricing derivatives by taking counterparty credit risk into account. Our framework shows how to perform the risky valuation and how to calculate the bilateral CVA at a portfolio level. This framework can easily incorporate various credit mitigation techniques, such as netting agreements and margin agreements, and can capture wrong way risk. Numerical results show that these credit mitigation techniques and wrong/right way risk have significant impacts on CVA.https://www.infona.pl/resource/bwmeta1.element.ID-d5309248-1d14-4369-a96f-f26cfe3eddcc/tab/reference