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Exact Methods for Path-Dependent Credit Exposure

Zhou, Richard (2015): Exact Methods for Path-Dependent Credit Exposure.

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Abstract

Path dependent counterparty credit risk exposure modeling poses challenges. In this paper, we present models for consistent and accurate estimation of counterparty credit exposure involving barrier option and European swaption under the general Monte Carlo simulation framework. In particular, we discuss how to consistently estimate the pathwise swaption exercise probability and accurate monitoring of barrier crossing. We present exact formulation for standalone expected exposure and potential future exposure for swap, swaption and barrier option without monte carlo simulation. The exact formulation is of practical importance to computing standalone exposure profiles, exposure model validation and system benchmarking.

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