Modeling Path Dependent Counterparty Credit Risk

Zhou, Richard (2015): Modeling Path Dependent Counterparty Credit Risk.

Abstract

Path dependent counterparty credit risk exposure modeling poses challenges. In this paper, we discuss practical models for consistent and accurate estimation of counterparty credit exposure involving path-dependent derivatives. We derive analytical formulas for standalone expected exposure (EE), potential future exposure (PFE) and unilateral CVA for swap, swaption and barrier option. These formulas are of practical importance to financial institutions that use standalone exposure profiles, as well as to facilitate model validation and benchmarking.

• Item Type: MPRA Paper
• Language: English
• Keywords: Counterparty credit risk, path-dependent, PFE, EE
• Subjects: C - Mathematical and Quantitative Methods > C0 - General > C02 - Mathematical Methods; C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling

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