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Samsaveel
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Posts: 436
Joined: April 20th, 2008, 5:47 am

Exposure profile PFE for 1st generation Fx Exotics

May 4th, 2014, 12:45 pm

Hi,any leads (articles ,Books ) on implementing Credit simulations,PFE ,CVA for Fx exotics methodology ,and reporting choice ?it seems there is nothing on the net specifically targeted towards FX exotics!how to get the PFE profile for Binary,Touch and digital Fx options ?thanks,
 
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Chargerbullit
Posts: 44
Joined: August 20th, 2008, 10:35 am

Exposure profile PFE for 1st generation Fx Exotics

May 11th, 2014, 8:07 pm

Hey,Try these books:Duffie and Singleton - Credit Risk: Pricing, Measurement, and Management (ISBN-13: 978-0691090467)Chriss - Black-Scholes and Beyond: Option Pricing Models (ISBN-13: 978-0786310258)Shimko - Credit Risk: Models and Management (ISBN-13: 978-1904339212)I am not sure how much they will help you, but it's worth a try. I don't think you will manage to get a simulated PFE profile for these FX-Exotics. The optionality that is imbedded in the structures makes it difficult to model in a simulated setting, so if you can't simulate it then you would have to reflect the risk profile with a MtM + Add-On convention.Chargerbullit
 
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Samsaveel
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Posts: 436
Joined: April 20th, 2008, 5:47 am

Exposure profile PFE for 1st generation Fx Exotics

May 14th, 2014, 3:53 pm

can you aggregate PFE simulated with a PFE MtM + add for a counterparty ?
 
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Chargerbullit
Posts: 44
Joined: August 20th, 2008, 10:35 am

Exposure profile PFE for 1st generation Fx Exotics

May 14th, 2014, 6:20 pm

Hey,Yes, you can do that without any problems and you should, in fact, depict your exposure that way anyways. You can include three profiles; 1) simulated + 2) non-simulated exposure and then 3) a total exposure profile where both are aggregated. That way you can see both the overall and the individual exposure profiles in your GUI.CB
Last edited by Chargerbullit on May 14th, 2014, 10:00 pm, edited 1 time in total.
 
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Samsaveel
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Posts: 436
Joined: April 20th, 2008, 5:47 am

Exposure profile PFE for 1st generation Fx Exotics

May 15th, 2014, 3:23 am

how does that fit in computing the EPE at each exposure date ? do you algebraically add the EPE + analytic exposure to get total EPE ?
 
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Chargerbullit
Posts: 44
Joined: August 20th, 2008, 10:35 am

Exposure profile PFE for 1st generation Fx Exotics

May 15th, 2014, 8:09 pm

Your EPE is basically a risk neutral valuation of the derivative position (stand alone and/or on a portfolio level). EPE is only really interesting when it comes to CVA charges and is a whole different ballgame in comparison to PFE exposures. As far as I know, you can also simply sum the simulated and non-simulated EPE profiles, but that is also an issue that is dependent on internal guidelines and methods. The problem with having non-simulated and simulated profiles is that you lose a lot of portfolio effects, so you have to either figure out some way to take that into account ("not bloody likely") or you use a conservative approach and sum the two results and calculate your charges on that figure.I don't know how much individual research you have done into the CVA/DVA/FVA topic, but I can pass on some ancillary articles that touch on all three subjects, just send me a PN and I'll send the links that I can still find. I can offer you this one upfront: UBS CVA PresentationCB
Last edited by Chargerbullit on May 14th, 2014, 10:00 pm, edited 1 time in total.
 
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Samsaveel
Topic Author
Posts: 436
Joined: April 20th, 2008, 5:47 am

Exposure profile PFE for 1st generation Fx Exotics

May 21st, 2014, 1:45 am

what is the counter-party credit exposure on a vanilla target Redemption Forward with a cap from a sellers point of view ?
 
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Chargerbullit
Posts: 44
Joined: August 20th, 2008, 10:35 am

Exposure profile PFE for 1st generation Fx Exotics

July 23rd, 2014, 7:42 pm

I'm going to ask you a few questions and they should steer you to the right answer:1) who is buying what currency? What kind of option/forward are you buying by selling the counterparty this structure?2) is there leverage? 3) what is your worst case?4) are you able to accurately model and simulate PFEs for simple FX-Options?5) how is the trade booked by your front office?6) is the trade delivered with every expiry (including leverage) into your exposure management system?7) if a trade is delivered into the exposure management system and the exposure is incorrect, do you correct it or do you leave it as is (and underestimate/overestimate your true exposure)?8) does the target pot (which is usually only a few pips = 0.40 in some cases) make any kind of difference for your PFE?9) does it make a difference to care about early termination or optionality of barriers or callable structures when you have a distinct worst case?10) who benefits from the cap? Does it help to reduce your worst case exposure (I doubt it, but in any case..)?I'm sorry that I missed your extra post way back when. There are a few questions that you should review and think about. If need be, we can discuss it further at some point.CB
Last edited by Chargerbullit on July 22nd, 2014, 10:00 pm, edited 1 time in total.
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