Efficient Option Pricing Under Levy Processes, with CVA and FVA
31 Pages Posted: 25 Mar 2015
Date Written: March 23, 2015
We generalize the Piterbarg (2010) model to include 1) bilateral default risk as in Burgard and Kjaer (2012), and 2) jumps in the dynamics of the underlying asset using general classes of Lévy processes of exponential type. We develop an efficient explicit-implicit scheme for European options and barrier options taking CVA-FVA into account. We highlight the importance of this work in the context of trading, pricing and management a derivative portfolio given the trajectory of regulations.
Keywords: Credit Valuation Adjustment (CVA), Funding Valuation Adjustment (FVA), KoBoL, CGMY, Variance Gamma, DEJD, European Options, Barrier Options
JEL Classification: G12
Suggested Citation: Suggested Citation