Potential Future Exposure of Target Redemption Forwards

Wilmott Magazine, September 2023, 88-93

14 Pages Posted: 21 Nov 2022 Last revised: 20 Sep 2023

Date Written: November 1, 2022

Abstract

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

Sivorot, Steven and Renzitti, Stefano, Potential Future Exposure of Target Redemption Forwards (November 1, 2022). Wilmott Magazine, September 2023, 88-93, Available at SSRN: https://ssrn.com/abstract=4265110 or http://dx.doi.org/10.2139/ssrn.4265110

Steven Sivorot (Contact Author)

S&P Global ( email )

1066 West Hastings Street
Unit 1780
Vancouver, BC V6E 3X1
Canada
1-778-372-4537 (Phone)

Stefano Renzitti

S&P Global ( email )

1066 West Hastings Street
Vancouver, British Columbia V6E 3X1
Canada

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
134
Abstract Views
427
Rank
365,183
PlumX Metrics