From what I recall, the problem was something as follows:
Cash Flow in Year 1: 1,000,000 with a probability of default of 35%, a recovery rate of 70% and a discount factor of .90
Cash Flow in Year 2: 750,000 with a probability of default of 40%, a recovery rate of 80% and a discount factor of .85
I solved this as follows:
1,000,000 * 0.35 * (1 - 0.70) * 0.90 = 94,500
750,000 * 0.40 * (1 - 0.80) * 0.85 = 51,000
CVA = 94,500 + 51,000 = 144,500
Is this the correct approach?
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