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Evaluation of counterparty risk for derivatives with early-exercise features

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  • Breton, Michèle
  • Marzouk, Oussama

Abstract

We introduce an efficient numerical approach to evaluate counterparty risk and we compute the Credit Valuation Adjustment for derivatives having early-exercise features. The approach is flexible and can account for wrong-way risk and various models for the underlying risk factor’s dynamics. Numerical experiments are presented to illustrate the efficiency and versatility of the method.

Suggested Citation

  • Breton, Michèle & Marzouk, Oussama, 2018. "Evaluation of counterparty risk for derivatives with early-exercise features," Journal of Economic Dynamics and Control, Elsevier, vol. 88(C), pages 1-20.
    • Handle: RePEc:eee:dyncon:v:88:y:2018:i:c:p:1-20
    DOI: 10.1016/j.jedc.2018.01.014
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    References listed on IDEAS

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    1. Cheikh Mbaye & Frédéric Vrins, 2022. "Affine term structure models: A time‐change approach with perfect fit to market curves," Mathematical Finance, Wiley Blackwell, vol. 32(2), pages 678-724, April.

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    More about this item

    Keywords

    Finance; Credit risk; Credit valuation adjustment; Dynamic programming; Computational method;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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