Efficient computation of exposure profiles on real-world and risk-neutral scenarios for Bermudan swaptions

Cornelis W. Oosterlee, Qian Feng, Shashi Jain, Patrik Karlsson and Drona Kandhai

Journal of Computational Finance

Abstract: ABSTRACT This paper presents a computationally efficient technique for the computation of;exposure distributions at any future time under the risk-neutral and some observed;real-world probability measures; these are needed for the computation of credit valuation;adjustment (CVA) and potential future exposure (PFE). In particular,we present a;valuation framework for Bermudan swaptions. The essential idea is to approximate the;required value function via a set of risk-neutral scenarios and use this approximated;value function on the set of observed real-world scenarios. This technique significantly;improves the computational efficiency by avoiding nested Monte Carlo simulation;and using only basic methods such as regression.We demonstrate the benefits of this technique by computing exposure distributions for Bermudan swaptions under;the Hull-White and G2++ models.

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