Feynman Kac for Functional Jump Diffusions with an Application to Credit Value Adjustment
15 Pages Posted: 26 Sep 2014 Last revised: 22 Jun 2015
Date Written: June 19, 2015
We provide a proof for the functional Feynman-Kac Theorem for jump diffusions with path-dependent coefficients. To obtain this result we first study the existence and uniqueness of solutions to functional jump diffusions and derive a useful bound for the solution. We apply our results to the problem of Credit Value Adjustment (CVA) in a bilateral counterparty risk framework. We derive the corresponding functional CVA-PIDE and extend existing results on CVA to a setting which enables the pricing of path-dependent derivatives.
Keywords: Functional Feynman-Kac Theorem, functional Ito formula, functional jump diffusion, path-dependent coefficients, Credit Value Adjustment, bilateral counterparty risk, path-dependent derivatives, Asian option
JEL Classification: G13, C63
Suggested Citation: Suggested Citation