Advanced Search
MyIDEAS: Login to save this article or follow this journal

Counterparty Risk Pricing: Impact Of Closeout And First-To-Default Times


Author Info


    (Department of Mathematics, King's College London, London WC2R 2LS, UK)


    (Department of Mathematics, King's College London, London WC2R 2LS, UK)


    (Banca IMI and Bocconi University, Milan, Italy)


In the absence of a universally accepted procedure for the credit valuation adjustment (CVA) calculation, we compare a number of different bilateral counterparty valuation adjustment (BVA) formulas. First we investigate the impact of the choice of the closeout convention used in the formulas. Important consequences on default contagion manifest themselves in a rather different way depending on which closeout formulation is used (risk-free or replacement), and on default dependence between the two entities in the deal. Second we compare the full bilateral formula with an approximation that is based on subtracting two unilateral credit valuation adjustment (UCVA) formulas. Although the latter might be attractive for its instantaneous implementation once one has a unilateral CVA system, it ignores the impact of the first-to-default time, when closeout procedures are ignited. We illustrate in a number of realistic cases both the contagion effect due to the closeout convention, and the CVA pricing error due to ignoring the first-to-default time.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL:
Download Restriction: Access to full text is restricted to subscribers.

File URL:
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.

Volume (Year): 15 (2012)
Issue (Month): 06 ()
Pages: 1250039-1-1250039-23

as in new window
Handle: RePEc:wsi:ijtafx:v:15:y:2012:i:06:p:1250039-1-1250039-23

Contact details of provider:
Web page:

Order Information:

Related research

Keywords: Credit valuation adjustment; unilateral CVA; bilateral CVA; simplified bilateral CVA; debit valuation adjustment; closeout; equity forward contract; zero coupon bond; bivariate exponential distributions; Gumbel bivariate exponential distributions;


No references listed on IDEAS
You can help add them by filling out this form.


Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Damiano Brigo & Qing Liu & Andrea Pallavicini & David Sloth, 2014. "Nonlinear Valuation under Collateral, Credit Risk and Funding Costs: A Numerical Case Study Extending Black-Scholes," Science & Finance (CFM) working paper archive 1404.7314, Science & Finance, Capital Fund Management.


This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.


Access and download statistics


When requesting a correction, please mention this item's handle: RePEc:wsi:ijtafx:v:15:y:2012:i:06:p:1250039-1-1250039-23. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Tai Tone Lim).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.