The computation of counterparty credit exposures such as Potential Future Exposure (PFE), as well as Economic Capital calculations by insurance firms, require risk-neutral (RN) pricing at future time horizons along real world (RW) scenarios. The challenge with these calculations is that the nested simulations (often called Brute Force simulations) can be very computationally challenging for large portfolios of deals, requiring billions of simulation paths and taking significant amounts of time.
An innovative new approach for nested simulations has been introduced recently. The new approach, called Real World Algorithmic Exposure, combines resampling with the Backward Monte Carlo-based Algorithmic Exposure (also known as American or Least Squares Monte Carlo). The approach avoids the inefficiency of the Brute Force approach and dramatically reduces computation times, by using resampling to bridge the gap between real world economic scenarios and risk-neutral pricing scenarios, and by performing the computation in one step via Backward Monte Carlo.
On Wednesday, September 16th featured speaker Dr. Ping Sun, Executive Director of Financial Engineering at Numerix, provided an introduction to Real World Algorithmic Exposure and outlined how it can be utilized by both capital market and insurance practitioners for advanced risk measures like RW PFE and for other RW/RN nested simulations.
Ping Sun, PhD, Executive Director of Financial Engineering, Numerix
Dr. Ping Sun is Executive Director of Financial Engineering and Head of Equity, Foreign Exchange and Commodity Solutions at Numerix. He works with clients to help solve their derivative pricing and risk management challenges and drives the development of the Numerix Real World modeling framework as a project manager. Dr. Sun’s extensive experience includes publications in academic oriented journals, academic lecturing, and also developing the Numerix cross currency ESG. During his career at Numerix, he also served as a Consultant and FX/EQ Desk Quant for the Lehman Brothers estate. Dr. Sun was a postdoctoral fellow at Rutgers University, and he earned a doctorate degree in Physics from City College of New York.
Moderator: Greg Murray, Vice President, Product Marketing
Greg Murray oversees product marketing initiatives at Numerix, focusing on go-to-market strategies and marketing of Numerix’s derivative pricing and risk analytics. Prior to his current role, Mr. Murray worked in derivative analytics sales roles at Numerix and at other software firms. He also held derivative trading positions for seven years as an option market-maker and proprietary trader across a variety of asset classes.