CVA UNDER ALTERNATIVE SETTLEMENT CONVENTIONS AND WITH SYSTEMIC RISK

We propose a fairly general framework which allows one to perform Credit Value Adjustment (CVA) computations for a contract with bilateral counterparty risk in the presence of (a) systemic risk and (b) wrong-way or right-way risks. Our methodology focuses on the role of alternative settlement clauses, but it also aims to cover various features of margin agreements. We present a comparative analysis of numerical results that supports our initial conjecture that alternative specifications of settlement values have a nonnegligible impact on CVA computations for contracts with bilateral counterparty risk. Our conclusions emphasize the practical importance of more sophisticated models that are capable of fully reflecting the actual features of financial contracts, as well as the influence of the market environment.