The credit crisis and the ongoing European sovereign debt crisis have highlighted the native form of credit risk, namely the counterparty risk. The related credit valuation adjustment (CVA), debt valuation adjustment (DVA), liquidity valuation adjustment (LVA) and replacement cost (RC) issues,...

We introduce an innovative theoretical framework for the valuation and replication of derivative transactions between defaultable entities based on the principle of arbitrage freedom. Our framework extends the traditional formulations based on credit and debit valuation adjustments (CVA and...