CVA and FVA with funding aware close outs

Abstract

The claim on a derivative contract upon default of one of the counterparties depends on the way the close-out amount is determined. Whether or not this close-out amount includes the cost of funding affects the CVA and FVA. We specify how to calculate CVA and FVA under different funding cost dependent close-out rules

Keywords: Counterparty risk, Closeout rules, CVA, FVA, Funding, PDE, Feynman-Kac theorem

JEL Classification: G13