It is assumed that a company can default after one year or after two years.The probability of default at each time is 1.5%.The present value of the expected loss to a bank on a derivatives portfolio if the company defaults after one year is estimated to be $1 million.The present value of the expected loss if it defaults after two years is estimated to be $2 million.Which of the following is the bank's CVA ?
A) $3,000,000
B) $300,000
C) $45,000
D) $150,000

Question

Quizplus · Accepted Answer

The present value of the expected loss is 0.015×$1,000,000 + 0.015×$2,000,000 or $45,000.This is the CVA.

It Is Assumed That a Company Can Default After One