Suppose a company has entered into a forward contract to sell at $500 per unit of some commodity in two years to a bank. The current forward price of the contract is $450 per unit. Defaults are assumed to happen in the middle of every quarter over the life of the forward contract. The default probability is 0.005038 per quarter in year 1 and 0.007586 quarterly in year 2. The risk-free interest rate is 4% per annum (continuously compounded), the recovery rate is 40%, and the volatility of the forward price of the commodity is 25%. No collateral. (1) What is the CVA? (2) What is the VA? Please show the calculations.

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To calculate the Credit Value Adjustment CVA and the Value Adjustment VA we need to consider the giv... View the full answer