Barclays Bank bought a call option with 3 years to expiration from a hedge fund. The expected value of the option and the probabilities of default are given below:

 

Assume that the option is uncollateralized, there is no recovery in the case of default and there are no other open positions with the hedge fund. The appropriate equivalent annual interest rate is 5% for all maturities.

1. What is the bank's CVA (in $ million)?

2. What is the bank's DVA (in $ million)?

Year Expected value of option to bank ($ million) Probability of bank defaulting Probability of hedge fund defaulting 1 10 2% 5% 2 12 296 5% 3 15 2% 5%