Potential Future Exposure of Target Redemption Forwards
Wilmott Magazine, Forthcoming
14 Pages Posted: 21 Nov 2022 Last revised: 16 Jan 2023
Date Written: November 1, 2022
We calculate the PFE of TARFs using both a smile aware Heston model and a smile unaware Garman-Kohlhagen (GK) model. Results show that the FX Heston model tends to produce significantly different PFEs than the GK model, highlighting the importance for a dealer’s global simulation model to accurately capture 1) the distribution of the underlying spot rate, and 2) the joint distribution of the underlying and its implied volatility surface.
Keywords: PFE, FX Heston, Garman-Kohlhagen, Monte Carlo, FX Option, TARF, TARN
JEL Classification: C60
Suggested Citation: Suggested Citation
Sivorot, Steven and Renzitti, Stefano, Potential Future Exposure of Target Redemption Forwards (November 1, 2022). Wilmott Magazine, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4265110 or http://dx.doi.org/10.2139/ssrn.4265110
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