Lattice method to monitor credit risk

Gerasimos · October 9th, 2009, 8:02 pm

Does anyone have a view on monitoring credit risk using the lattice method? This method has been used for CVA/ hedging purposes by a certain number of banks but not for regulatory/ monitoring purposes. Is the method more accurate and computationally efficient than the traditional MC simulation approach (diffussion of risk factors, trade valuation, aggregation and statistical analysis within a 95% - 99% CI)? I know that Lehmans used this method for exposure management but has any other bank gone live with it?

anp31415 · October 14th, 2009, 7:30 am

Gerasimos,Given that normally you need to strike the balance between the accuracy and performance the lattice should come handy when pricing complex/exotic transactions, e.g. you wouldn't probably use the FO pricer for CDOs, but either a lattice or an LHP approximations should work. The usual trouble with lattices is that you need to know upfront the min and max values on each dimension.I've got a question for you - given the decision is based on the performance constraint, what are your thouths on using GPUs?Thanks