Evaluating credit valuation adjustment with wrong-way risk for Bermudan options

Bing Dong, Wei Xu and Guangguang Wang

Journal of Computational Finance

Abstract: Calculating the credit valuation adjustment (CVA) of a Bermudan option with wrong-way risk is computationally challenging because of the highly demanding simulations and the presence of two stopping times: the counterparty default time and the optimal early exercise time. In this paper we propose an efficient and accurate numerical framework for CVA evaluation that fully avoids simulations, with the wrong-way risk tracked by both the intensity rate model and the jump-at-default model. The optimal exercise boundary impacted by the counterparty credit risk can also be determined under the same framework. Our method therefore provides a proxy that can aid regulatory frameworks and allow option pricing and CVA quotes to be executed on the same platform.

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Persistent link: https://EconPapers.repec.org/RePEc:rsk:journ0:7958727

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