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Monte Carlo Calculation of Exposure Profiles and Greeks for Bermudan and Barrier Options under the Heston Hull-White Model

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  • Q. Feng
  • C. W. Oosterlee

Abstract

Valuation of Credit Valuation Adjustment (CVA) has become an important field as its calculation is required in Basel III, issued in 2010, in the wake of the credit crisis. Exposure, which is defined as the potential future loss of a default event without any recovery, is one of the key elementsfor pricing CVA. This paper provides a backward dynamics framework for assessing exposure profiles of European, Bermudan and barrier options under the Heston and Heston Hull-White asset dynamics. We discuss the potential of an efficient and adaptive Monte Carlo approach, the Stochastic Grid Bundling Method}(SGBM), which employs the techniques of simulation, regression and bundling. Greeks of the exposure profiles can be calculated in the same backward iteration with little extra effort. Assuming independence between default event and exposure profiles, we give examples of calculating exposure, CVA and Greeks for Bermudan and barrier options.

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  • Q. Feng & C. W. Oosterlee, 2014. "Monte Carlo Calculation of Exposure Profiles and Greeks for Bermudan and Barrier Options under the Heston Hull-White Model," Papers 1412.3623, arXiv.org.
    • Handle: RePEc:arx:papers:1412.3623
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    References listed on IDEAS

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    1. Carriere, Jacques F., 1996. "Valuation of the early-exercise price for options using simulations and nonparametric regression," Insurance: Mathematics and Economics, Elsevier, vol. 19(1), pages 19-30, December.
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    5. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," The Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 113-147.
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    Cited by:

    1. Anastasia Borovykh & Andrea Pascucci & Cornelis W. Oosterlee, 2019. "Efficient Computation of Various Valuation Adjustments Under Local L\'evy Models," Papers 1905.01706, arXiv.org.

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