Suppose that a financial contract that promises to pay a from partyB to party A at maturity date T , and nothing before date T where . The payoff may be positive or negative, i.e. the contract may be either an asset or a liability to each party. All calculations are from the perspective of party A.
At time T , there are a total of four () possible states shown in Table 1. The risky value of the contract is the discounted expectation of the payoffs and is given by the following proposition.
Proposition 3: The bilateral risky value of the single-payment contract is given by