A Multi Interest Rate Curve Model for Exposure Modelling

27 Pages Posted: 18 Nov 2016

See all articles by Boldin Andreas

Boldin Andreas

Credit Suisse AG

Roland Lichters

Quaternion Risk Management

Süss André

Credit Suisse AG

Markus Trahe

Credit Suisse AG

Date Written: November 16, 2016

Abstract

The tenor basis phenomenon became significant with the 2007 financial crisis and has altered the traditional way of one-curve pricing and risk management to a multi-curve phenomenon. The stochastic nature of basis spreads between curves particularly poses a challenge for forward looking applications like XVA or real world measure exposure analytics. This paper presents a Two- factor Gaussian approach for modelling multiple fixing curves and basis spreads in the risk neutral and spot measure, shows the impact on basis swap exposure, investigates the correlation structure and discusses the pros and cons of interpreting as a spread or multi curve model respectively.

Keywords: exposure modelling, interest rates, stochastic basis, Hull-White, multi factor model

JEL Classification: G12, C63

Suggested Citation

Andreas, Boldin and Lichters, Roland and André, Süss and Trahe, Markus, A Multi Interest Rate Curve Model for Exposure Modelling (November 16, 2016). Available at SSRN: https://ssrn.com/abstract=2870698 or http://dx.doi.org/10.2139/ssrn.2870698

Boldin Andreas

Credit Suisse AG ( email )

Uetlibergstrasse 231
Zurich, 8045
Switzerland

Roland Lichters

Quaternion Risk Management ( email )

54 Fitzwilliam Square North
Dublin, D02X308
Ireland

Süss André

Credit Suisse AG ( email )

Uetlibergstrasse 231
Zurich, 8045
Switzerland

Markus Trahe (Contact Author)

Credit Suisse AG ( email )

Uetlibergstrasse 231
Zürich, 8045
Switzerland

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