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Modeling Path Dependent Counterparty Credit Risk

Author

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  • Zhou, Richard

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.

Suggested Citation

  • Zhou, Richard, 2015. "Modeling Path Dependent Counterparty Credit Risk," MPRA Paper 61354, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:61354
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    File URL: https://mpra.ub.uni-muenchen.de/61354/1/MPRA_paper_61354.pdf
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    References listed on IDEAS

    as
    1. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-592.
    2. Damiano Brigo & Cristin Buescu & Massimo Morini, 2011. "Impact of the first to default time on Bilateral CVA," Papers 1106.3496, arXiv.org.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Counterparty credit risk; path-dependent; PFE; EE;

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling

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