Efficient Monte Carlo Counterparty Credit Risk Pricing and Measurement
by Federal Reserve Board (9781511918602)

Efficient Monte Carlo Counterparty Credit Risk Pricing and Measurement
Federal Reserve Board
Format: Paperback / softback
Pages: 44
Category: Business & Management
Publisher: Createspace
ISBN: 9781511918602
ISBN-10: 1511918608

Counterparty credit risk (CCR), a key driver of the 2007-08 credit crisis, has become one of the main focuses of the major global and U.S. regulatory standards. Financial institutions invest large amounts of resources employing Monte Carlo simulation to measure and price their counterparty credit risk. We develop efficient Monte Carlo CCR estimation frame- works by focusing on the most widely used and regulatory-driven CCR measures: expected positive exposure (EPE), credit value adjustment (CVA), and effective expected positive ex- posure (EEPE). Our numerical examples illustrate that our proposed efficient Monte Carlo estimators outperform the existing crude estimators of these CCR measures substantially in terms of mean square error (MSE). We also demonstrate that the two widely used sampling methods, the so-called Path Dependent Simulation (PDS) and Direct Jump to Simulation date (DJS), are not equivalent in that they lead to Monte Carlo CCR estimators which are drastically different in terms of their MSE.

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