Exact Methods for Path-Dependent Credit Exposure

23 Pages Posted: 4 Jan 2015 Last revised: 27 May 2015

Date Written: May 25, 2015

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 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

Suggested Citation

Zhou, Richard, Exact Methods for Path-Dependent Credit Exposure (May 25, 2015). Available at SSRN: https://ssrn.com/abstract=2544720 or http://dx.doi.org/10.2139/ssrn.2544720
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