Abstract
The semi-analytical single-trade CVA calculations of the previous chapters are computationally very efficient, especially when closed-form option pricing formulas are available. However, when we need to compute CVA for a netting set of derivatives — which is the more common case — this option pricing approach quickly reaches its limits:
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We would need to come up with an option pricing formula for varying underlying derivative portfolios. While this may still be possible for sufficiently simple portolios, each portfolio/trade combination represents a new problem which requires customization, mapping or development efforts.
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When the portfolio is complex and contains structured products, closed-form option pricers are not available anymore, and we would have to resort to numerical techniques for the option price in each case.
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When the portfolio is collateralized, and CSA details have to be taken into account, semi-analytical approaches are not feasible anymore.
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© 2015 Roland Lichters, Roland Stamm, Donal Gallagher
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Lichters, R., Stamm, R., Gallagher, D. (2015). Introduction — A Monte Carlo Framework. In: Modern Derivatives Pricing and Credit Exposure Analysis. Applied Quantitative Finance. Palgrave Macmillan, London. https://doi.org/10.1057/9781137494849_10
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DOI: https://doi.org/10.1057/9781137494849_10
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-137-49483-2
Online ISBN: 978-1-137-49484-9
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