CVA (Credit Value Adjustment) is calculated as the sum of discounted expected losses: CVA = Sum over t of [ LGD(t) * PD(t) * EE(t) * DF(t) ]

First, determine Loss Given Default (LGD): LGD(t) = 1 - Recovery Rate Year 1: LGD = 1 - 0.80 = 20% Year 2: LGD = 1 - 0.70 = 30% Year 3: LGD = 1 - 0.60 = 40%

Next, calculate the hazard rate (lambda) for each year: lambda = CDS Spread / LGD Year 1: lambda = 200 bps / 0.20 = 1000 bps = 10% Year 2: lambda = 300 bps / 0.30 = 1000 bps = 10% Year 3: lambda = 400 bps / 0.40 = 1000 bps = 10% Since the hazard rate is constant at 10%, we can find the marginal Probability of Default (PD) for each year using PD(t) = exp(-lambda * (t-1)) - exp(-lambda * t). Year 1 PD = 1 - exp(-0.1) = 0.0952 Year 2 PD = exp(-0.1) - exp(-0.2) = 0.0861 Year 3 PD = exp(-0.2) - exp(-0.3) = 0.0779

Next, define Expected Exposure (EE): Since Expected Positive Exposure (EPE) is AUD 14 million and collateral is AUD 11 million, uncollateralized EE = 14 - 11 = AUD 3 million for all years.

Then, calculate Discount Factors (DF) at r = 3%: Year 1 DF = exp(-0.03 * 1) = 0.9704 Year 2 DF = exp(-0.03 * 2) = 0.9418 Year 3 DF = exp(-0.03 * 3) = 0.9139

Finally, calculate the CVA components: Year 1: 0.20 * 0.0952 * 3 * 0.9704 = 0.0554 Year 2: 0.30 * 0.0861 * 3 * 0.9418 = 0.0730 Year 3: 0.40 * 0.0779 * 3 * 0.9139 = 0.0854

Total CVA = 0.0554 + 0.0730 + 0.0854 = AUD 0.2138 million, which rounds to AUD 0.214 million.