CVA liability - Selling call option

reaverprog · January 21st, 2013, 7:14 pm

Hi All,If I sell an uncollateralized option to a counterparty, say a call option, and I receive the total upfront on day 1. Do I still have to adjust for cva ? This will include my own risk (credit spread risk ?) since if I am about to go bust the value of my call option, which is my liability, will go to 0, and this represents a positive pnl for me.Is there anything wrong in my reasoning ?Thanks

Tad · January 22nd, 2013, 7:34 am

From my understanding there is no CVA on your side - however you may adjust for DVA, which is what you mention in your last sentence.

JoK78 · January 24th, 2013, 12:45 pm

You can think of it in the following way:If the upfront payment didnt account for the credit riskiness of your (i.e. the option seller's) payoff at the option maturity, T, that means than your counterparty lent you money today in cash at the riskless rate that you will pay back at T by the payoff of the option. This is a pnl gain for you, since you could borrow money well below your borrowing rate. I hope it helps.Cheers,JK