Bilateral CVA incorporates both the Credit Value Adjustment (CVA) and the Debt Value Adjustment (DVA), factoring in the joint probability of default. First, find the individual CVA and DVA components considering the probability that one party defaults while the other survives.

Loss Given Default (LGD):

• LGD for Prime Bank = $1 - 87% = 13%$
• LGD for ABC Bank = $1 - 91% = 9%$

Prime Bank's CVA (incorporating ABC's default and Prime's survival): $\text{CVA} = \text{LGD}_{\text{ABC}} \times \text{PD}_{\text{ABC}} \times (1 - \text{PD}_{\text{Prime}}) \times \text{EPE}$ $\text{CVA} = 0.09 \times 0.023 \times (1 - 0.031) \times 2,500,000$ \text{CVA} \approx 0.09 \times 0.023 \times 0.969 \times 2,500,000 \approx \`$5`,014.58 \approx \`$5`,015

Prime Bank's DVA (incorporating Prime's default and ABC's survival): $\text{DVA} = \text{LGD}_{\text{Prime}} \times \text{PD}_{\text{Prime}} \times (1 - \text{PD}_{\text{ABC}}) \times \text{ENE}$ $\text{DVA} = 0.13 \times 0.031 \times (1 - 0.023) \times 1,800,000$ \text{DVA} \approx 0.13 \times 0.031 \times 0.977 \times 1,800,000 \approx \`$7`,087.16 \approx \`$7`,087

Bilateral CVA (net adjustment magnitude): \text{BCVA} = |\text{CVA} - \text{DVA}| = |5,015 - 7,087| = \`$2`,072

Thus, the absolute net bilateral CVA adjustment is `$2`,072.