2014
Efficient computation of exposure profiles for counterparty credit risk
Publication
Publication
International Journal of Theoretical and Applied Finance , Volume 17 - Issue 4
Three computational techniques for approximation of counterparty exposure for financial
derivatives are presented. The exposure can be used to quantify so-called Credit Valuation
Adjustment (CVA) and Potential Future Exposure (PFE), which are of utmost
importance for modern risk management in the financial industry, especially since the
recent credit crisis. The three techniques all involve a Monte Carlo path discretization
and simulation of the underlying entities. Along the generated paths, the corresponding
values and distributions are computed during the entire lifetime of the option. Option
values are computed by either the finite difference method for the corresponding partial
differential equations, or the simulation-based Stochastic Grid Bundling Method
(SGBM), or by the COS method, based on Fourier-cosine expansions. In this research, numerical results are presented for early-exercise options. The underlying asset dynamics
are given by either the Black–Scholes or the Heston stochastic volatility model.
Keywords: Expected exposure; potential future exposure; Bermudan options; Heston;
numerical computation; finite differences; stochastic grid bundling method.
Additional Metadata | |
---|---|
Unspecified | |
World Scientific | |
doi.org/10.1142/S0219024914500241 | |
International Journal of Theoretical and Applied Finance | |
Organisation | Scientific Computing |
de Graaf, K., Feng, Q., Kandhai, B. D., & Oosterlee, K. (2014). Efficient computation of exposure profiles for counterparty credit risk. International Journal of Theoretical and Applied Finance, 17(4). doi:10.1142/S0219024914500241 |