Counterparty Credit Risk and Wrong Way Risk; a Least Square Montecarlo Approach
Proceedings of VI MACI 2017
4 Pages Posted: 28 Apr 2021
Date Written: May 19, 2017
This article presents the use of Least Squares Monte Carlo (LSMC) and Copula methodology for derivative option pricing including Counterparty Credit Risk. Since the financial crisis of 2008, the financial industry and the regulatory authorities began adjust the price of derivatives due to counterparty risk. Our purpose is pricing an American option using LSMC methodology and including the so-called Wrong Way Risk, through copula methodology, to represent the interaction between market and credit risk.
Keywords: Counterparty Credit Risk, Least Squares Monte Carlo, Wrong Way Risk, CVA, Copula
JEL Classification: G12, G13
Suggested Citation: Suggested Citation