## Order the answer to: Suppose that, for a particular…

Question | Suppose that, for a particular three-year derivative entered into by a bank, two outcomes, A and B, are equally likely. Under outcome A, the values of the derivative at the mid-point of the first, second, and third years are 3, 5, and 7, respectively. Under outcome B, the values of the derivative at the mid points of the first, second, and third years are ?2, ?4, and ?6. The probability of the counterparty defaulting each year is 1% and the probability of the bank defaulting each year is 0.5%. Calculate the bank’s CVA and DVA. Assume that interest rates are zero, no collateral is posted, and there are no other transactions between the two parties. |
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Subject | business-corporate-finance |

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