Cutting CVA's complexity

Cutting CVA's complexity

lego model

The recent financial crisis has highlighted the importance of the credit value adjustment (CVA) when pricing derivatives. Bilateral counterparty risk is the risk that the issuer of a derivative, or its counterparty, may default prior to the expiry and fail to make future payments. For Markovian models, this leads naturally to non-linear second-order parabolic partial differential equations (PDEs) to price the contract. More precisely, the non-linearity in the pricing equation affects none of