Bilateral CVA of optional early termination clauses

Bilateral CVA of optional early termination clauses

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The impact of close-out conventions consistent with International Swaps and Derivatives Association master agreements for derivative contracts, especially their effect on counterparty credit risk adjustment, has been studied in Brigo & Morini (2011) and Brigo, Buescu & Morini (2011). The choice between the so-called risk-free and substitution close-out values can have a large effect on pricing, through their role in additional termination events.

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