A derivatives dealer has a single transaction with a company which is a long position in a five-year option. The Black-Scholes-Merton value of the option is $6
Suppose that the credit spread on five-year bonds issued by the company is 100 basis points. What is the dealer's CVA per option purchased from the counterparty?
A. $0.19
B. $1.19
C. $0.29
D. $1.29
C
The value of the option when the counterparty's credit risk is taken into account is 6eā0.01Ć5=5.71 and so the CVA is 6ā5.71 or $0.29 per option purchased
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