Efficient Option Pricing Under Levy Processes, with CVA and FVA

31 Pages Posted: 25 Mar 2015

See all articles by Justin Shek

Justin Shek

Bank of China International

Jimmy Law

Ernst & Young, UK

Sergei Levendorskii

Calico Science Consulting

Date Written: March 23, 2015

Abstract

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

Shek, Chun Kong and Law, Jimmy and Levendorskii, Sergei Z., Efficient Option Pricing Under Levy Processes, with CVA and FVA (March 23, 2015). Available at SSRN: https://ssrn.com/abstract=2584037 or http://dx.doi.org/10.2139/ssrn.2584037

Chun Kong Shek

Bank of China International ( email )

Hong Kong
China

Jimmy Law

Ernst & Young, UK ( email )

1 MORE LONDON PLACE
LONDON, SE1 2AF
United Kingdom

Sergei Z. Levendorskii (Contact Author)

Calico Science Consulting ( email )

Austin, TX
United States

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