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
C
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.
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