  We depart from the usual methods for pricing contracts with the counterparty
credit risk found in most of the existing literature. In effect, typically,
these models do not account for either systemic effects or at-first-default
contagion and postulate that the contract value at default equals either the
risk-free value or the pre-default value. We propose instead a fairly general
framework, which allows us to perform effective Credit Value Adjustment (CVA)
computations for a contract with bilateral counterparty risk in the presence of
systemic and wrong or right way risks. Our general methodology focuses on the
role of alternative settlement clauses, but it is also aimed to cover various
features of margin agreements. A comparative analysis of numerical results
reported in the final section supports our initial conjecture that alternative
specifications of settlement values have a non-negligible impact on the CVA
computation for contracts with bilateral counterparty risk. This emphasizes the
practical importance of more sophisticated models that are capable of fully
reflecting the actual features of financial contracts, as well as the influence
of the market environment.
