  This article presents a generic model for pricing financial derivatives
subject to counterparty credit risk. Both unilateral and bilateral types of
credit risks are considered. Our study shows that credit risk should be modeled
as American style options in most cases, which require a backward induction
valuation. To correct a common mistake in the literature, we emphasize that the
market value of a defaultable derivative is actually a risky value rather than
a risk-free value. Credit value adjustment (CVA) is also elaborated. A
practical framework is developed for pricing defaultable derivatives and
calculating their CVAs at a portfolio level.
