Exposure & CVA for Large Portfolios of Vanilla Swaps: The Thin-Out Optimization
17 Pages Posted: 12 Oct 2012
Date Written: October 11, 2012
In this article we present an efficient optimization for calculating the exposure and CVA for large portfolios of vanilla swaps. It is based on a "thin-out" procedure applied to fixed payment streams, which reduces a very frequent stream of payments to a much less frequent one. The procedure requires careful handling of the path-dependence that arises from the floating legs of the swaps.
We compute the exposure and CVA for a large portfolio of fixed-for-floating swaps, and find that our approximation reduces the computation time for the portfolio to that of a single swap, with a roughly annual schedule. Moreover, the approximation maintains a particularly high accuracy. Our technique is entirely model independent and can be applied to various instruments such as FX-forwards, cross-currency swaps etc.
Keywords: credit exposure, CVA, vanilla swaps, large portfolios, optimization
JEL Classification: C1, C3, C5, C6
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