Exact Methods for Path-Dependent Credit Exposure
23 Pages Posted: 4 Jan 2015 Last revised: 27 May 2015
Date Written: May 25, 2015
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 accuratelt monitor barrier crossing. We present exact formulation for standalone expected exposure and potential future exposure for swap, swaption and barrier option without Monte Carlo. The exact formulation is of practical importance to computing standalone exposure profiles, exposure model validation and system benchmarking.
Keywords: CCR, Path-Dependent, Exposure, PFE, Swaption, Swap, Barrier option
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