Exposure & CVA for Large Portfolios of Vanilla Swaps: The Thin-Out Optimization

17 Pages Posted: 12 Oct 2012

Date Written: October 11, 2012

Abstract

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

Suggested Citation

Antonov, Alexandre and Brecher, Dominic, Exposure & CVA for Large Portfolios of Vanilla Swaps: The Thin-Out Optimization (October 11, 2012). Available at SSRN: https://ssrn.com/abstract=2160342 or http://dx.doi.org/10.2139/ssrn.2160342

Alexandre Antonov (Contact Author)

Danske Bank - Danske Markets ( email )

Holmens Kanal 2-12
DK-1092 Copenhagen K
Denmark

Dominic Brecher

Numerix ( email )

Vancouver, BC
Canada

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