Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/204279 
Authors: 
Year of Publication: 
2019
Publisher: 
ZBW – Leibniz Information Centre for Economics, Kiel, Hamburg
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.
Subjects: 
credit value adjustment (CVA)
credit risk modeling
financial derivative valuation
collateralization
margin and netting
JEL: 
E44
G21
G12
G24
G32
G33
G18
G28
Document Type: 
Working Paper

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