CVA and vulnerable options pricing by correlation expansions

2018/11/18 by Antonelli, Fabio, Ramponi, Alessandro, Scarlatti, Sergio
#Computational Finance (q-fin.CP) #FOS: Economics and business

paper · doi:10.48550/arxiv.1811.07294

Abstract

We consider the problem of computing the Credit Value Adjustment (CVA) of a European option in presence of the Wrong Way Risk (WWR) in a default intensity setting. Namely we model the asset price evolution as solution to a linear equation that might depend on different stochastic factors and we provide an approximate evaluation of the option's price, by exploiting a correlation expansion approach, introduced in \citeAS. We compare the numerical performance of such a method with that recently proposed by Brigo et al. (\citeBR18, \citeBRH18) in the case of a call option driven by a GBM correlated with the CIR default intensity. We additionally report some numerical evaluations obtained by other methods.

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