  The purpose of this paper is introducing rigorous methods and formulas for
bilateral counterparty risk credit valuation adjustments (CVA's) on
interest-rate portfolios. In doing so, we summarize the general arbitrage-free
valuation framework for counterparty risk adjustments in presence of bilateral
default risk, as developed more in detail in Brigo and Capponi (2008),
including the default of the investor. We illustrate the symmetry in the
valuation and show that the adjustment involves a long position in a put option
plus a short position in a call option, both with zero strike and written on
the residual net present value of the contract at the relevant default times.
We allow for correlation between the default times of the investor and
counterparty, and for correlation of each with the underlying risk factor,
namely interest rates. We also analyze the often neglected impact of credit
spread volatility. We include Netting in our examples, although other
agreements such as Margining and Collateral are left for future work.
