Consider a European call option on a non-dividend-paying stock where the stock price is 134, the strike price is 120, the risk-free rate is 5% p.a., the volatility 80% p.a., and the time to maturity is 1.5 years. Answer the following questions assuming no recovery in the event of default, that the probability of default is independent of the option valuation, no collateral is posted, and other transaction between the parties are outstanding.

a. Suppose the option seller has a 2% chance of default at maturity. Also, instead of paying the option price up front, the option buyer agrees to pay the forward value of the option price at the end of options life. What are the CVA and the contract value from the buyers viewpoint? (3 marks)

b. If in part (a) the option buyer has a 2% chance of defaulting at the end of the options life, what are the CVA and the contract value from the sellers viewpoint? (3 marks)