Total value adjustment for a stochastic volatility model. A comparison with the Black-Scholes model (Q2661015)

The authors extend the Black-Sholes-Merton model to include the significant dimension of counterparty risk, XPA, while embracing the case of stochastic volatility. It follows that the model is more flexible in its description of the underlying financial dynamics. This extension applies to both European and American vanilla options. A version of the Heston partial differential equation is derived, and numerical solutions are found. Also noted, this approach is popular in the financial industry.