Exact Methods for Path-Dependent Credit Exposure

Richard Zhou

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Counterparty credit exposure; expected exposure; PFE; swap; swaption; barrier option; monte carlo (search for similar items in EconPapers)
JEL-codes: C6 C60 (search for similar items in EconPapers)
Date: 2015-05-25, Revised 3025-05-25
New Economics Papers: this item is included in nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:64647

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