Abstract

http://ssrn.com/abstract=1960773
 
 

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Algorithmic Exposure and CVA for Exotic Derivatives


Alexandre Antonov


Numerix

Serguei Issakov


Numerix

Serguei Mechkov


Numerix

November 17, 2011


Abstract:     
We develop the algorithmic approach for Counterparty exposure calculation and automate its application to arbitrary complicated instruments. Assuming that the portfolio is priced by the backward (American) Monte-Carlo method, our approach allows calculating the credit exposure as a pricing by-product, essentially without modifications in the usual pricing procedure.

In particular, for the exposure calculation of callable instruments we manage to avoid a cumbersome aggregation of exercise indicators, applying them sequentially in parallel with the main pricing.

We explain how the obtained exposure can be integrated into the Credit Valuation Adjustment (CVA), based on the extension of the pricing model with a Counterparty credit component.

The presented approach to the exposure computation is formulated in an arbitrary probability measure. To perform the measure change we use the cross-currency model semantics and calibrate the model to the real-world measure using indexes projections.

Number of Pages in PDF File: 31

Keywords: Credit Exposure, Credit Valuation Adjustment, CVA, American Monte Carlo, backwards pricing, exotic detivatives

JEL Classification: C1, C3, C5, C6

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Date posted: November 18, 2011 ; Last revised: April 14, 2012

Suggested Citation

Antonov, Alexandre and Issakov, Serguei and Mechkov, Serguei, Algorithmic Exposure and CVA for Exotic Derivatives (November 17, 2011). Available at SSRN: http://ssrn.com/abstract=1960773 or http://dx.doi.org/10.2139/ssrn.1960773

Contact Information

Alexandre Antonov (Contact Author)
Numerix ( email )
8 rue de l'Isly
Paris, 75008
France
Serguei Issakov
Numerix ( email )
United States
Serguei Mechkov
Numerix ( email )
United States
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