Abstract
We propose a new pricing model for energy derivatives taking into account the counterparty credit risk (CCR). It is pointed out that, in the recent worldwide financial crisis, the CCR, especially the relation between the exposure at default (EAD) and the occurrence of default (called "Right/Wrong-Way risk") is not evaluated appropriately. Therefore, we improve the standard pricing model for the energy derivatives in order to evaluate the effects of the CCR and Right/Wrong-Way risk, and derive semi-analytical pricing formulas for liquid derivatives under the unilateral and bilateral credit valuation adjustments (CVA) settings, and show the features of the formulas numerically.
