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Explicit expressions to counterparty credit exposures for Forward and European Option
Li, Shuang1,2; Peng, Cheng1,2; Bao, Ying3; Zhao, Yanlong1,2
2020-04-01
Source PublicationNORTH AMERICAN JOURNAL OF ECONOMICS AND FINANCE
ISSN1062-9408
Volume52Pages:14
AbstractWith the fast development of over the counter (OTC) derivatives market, counterparty credit risk (CCR) has become one of the main risks that can even affect the survival of banks. As a result, it is essential to measure and manage CCR exposures. Giant financial institutions apply numerical methods such as the Monte Carlo to calculate exposures. However, the numerical methods usually cost a significant amount of time, and some advanced algorithms like distributed and parallel processing are usually used to accelerate the calculation. Nevertheless, for small banks, they cannot afford the calculation cost. In order to make small banks manage CCR more efficiently, this paper puts forward analytic models to measure CCR exposures and derives the explicit expressions to exposures for Forward contract and European Option, which are represented in the OTC market. The explicit expressions to credit exposures for Forward contract are derived under the assumption that the underlying market risk factors follow Geometric Brown Motion. For European Option case, the problem turns to be difficult since the analytic formula involves double-definite integral of Gaussian function that cannot be simplified into elementary functions. An approximating normal distribution function with integrability is proposed, then the analytic approximations of European Call Option's credit exposures and maximum errors are presented.
KeywordCounterparty credit exposure Explicit expressions Forward European Option
DOI10.1016/j.najef.2019.101130
Indexed BySCI
Language英语
WOS Research AreaBusiness & Economics
WOS SubjectBusiness, Finance ; Economics
WOS IDWOS:000526121400018
PublisherELSEVIER SCIENCE INC
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Document Type期刊论文
Identifierhttp://ir.amss.ac.cn/handle/2S8OKBNM/51128
Collection中国科学院数学与系统科学研究院
Corresponding AuthorZhao, Yanlong
Affiliation1.Acad Math & Syst Sci, Chinese Acad Sci, KLSC, Beijing 100190, Peoples R China
2.Univ Chinese Acad Sci, Sch Math Sci, Beijing 100049, Peoples R China
3.Ind & Commercial Bank China, Beijing 100032, Peoples R China
Recommended Citation
GB/T 7714
Li, Shuang,Peng, Cheng,Bao, Ying,et al. Explicit expressions to counterparty credit exposures for Forward and European Option[J]. NORTH AMERICAN JOURNAL OF ECONOMICS AND FINANCE,2020,52:14.
APA Li, Shuang,Peng, Cheng,Bao, Ying,&Zhao, Yanlong.(2020).Explicit expressions to counterparty credit exposures for Forward and European Option.NORTH AMERICAN JOURNAL OF ECONOMICS AND FINANCE,52,14.
MLA Li, Shuang,et al."Explicit expressions to counterparty credit exposures for Forward and European Option".NORTH AMERICAN JOURNAL OF ECONOMICS AND FINANCE 52(2020):14.
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