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Exact Methods for Path-Dependent Credit Exposure

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  • Zhou, Richard

Abstract

Path dependent counterparty credit risk exposure modeling poses challenges. In this paper, we present models for consistent and accurate estimation of counterparty credit exposure involving barrier option and European swaption under the general Monte Carlo simulation framework. In particular, we discuss how to consistently estimate the pathwise swaption exercise probability and accurate monitoring of barrier crossing. We present exact formulation for standalone expected exposure and potential future exposure for swap, swaption and barrier option without monte carlo simulation. The exact formulation is of practical importance to computing standalone exposure profiles, exposure model validation and system benchmarking.

Suggested Citation

  • Zhou, Richard, 2015. "Exact Methods for Path-Dependent Credit Exposure," MPRA Paper 64647, University Library of Munich, Germany, revised 25 May 3025.
    • Handle: RePEc:pra:mprapa:64647
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    File URL: https://mpra.ub.uni-muenchen.de/64647/1/MPRA_paper_64647.pdf
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    References listed on IDEAS

    as
    1. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," The Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-592.
    2. Damiano Brigo & Cristin Buescu & Massimo Morini, 2011. "Impact of the first to default time on Bilateral CVA," Papers 1106.3496, arXiv.org.
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    More about this item

    Keywords

    Counterparty credit exposure; expected exposure; PFE; swap; swaption; barrier option; monte carlo;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General

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