In this research paper, Drs. Alexandre Antonov, Serguei Issakov and Serguei Mechkov generalize the American Monte Carlo method to efficiently calculate future values (or exposures) of derivatives using an arbitrage-free model.

Specifically, they present efficient calculations of the portfolio values (exposure) in a self-consistent way using an arbitrage-free model that is calibrated to both implied market and real-world projections. They propose a new algorithmic method of simulation of exposures (distributions of future values) based on an iterative backward induction, a generalization of backward induction, especially attractive for exotic portfolios.

Backward Induction for Future Values

  • The paper applies this generalization to a simulation of exposures (distributions of future values) in the contexts of:
  • Various valuation adjustments (XVAs) due to counterparty risk, funding, capital, etc.,
  • Calculation of risk measures that use averages of future values, such as VAR and expected shortfall for market risk, and PFE EPE/ENE, etc. for counterparty risk.
  • Scenario generation, also in real-world measure.

Overall, highlights of this article include the generalization of the American / Least Square Monte Carlo method to compute the full future value – which we call Observation Value – by backward induction. The Observation Value accounts for all scenarios, including those on which exercises do occur, i.e. scenarios on which the instrument changes.

Complete the form to download this complimentary whitepaper, “Backward Induction for Future Values”

Authors: Dr. Alexandre Antonov,Dr. Serguei Issakov, and Dr. Serguei Mechkov

Download Numerix Research Paper

Complete the form below to download this complimentary research paper.

Select Form: 

Form #5: Research

Keep me informed of future research from Numerix:

Sign me up to receive "Thinking Derivatively" monthly newsletter by Numerix:

* Required fields
analyst report

Celent Research: Risk Technology for a Digital World

written blog

Thriving Amidst Volatility in the Energy Markets

written blog

FRTB: Are you ready for a new era in market risk management?

written blog

Introducing the Numerix Podcast: Navigating Trends in the Capital Markets

written blog

Assessing the Rise in Popularity of Zero Day Options

written blog

Investigating Banks’ Slow but Steady Path to Cloud Adoption

written blog

3 Ways to Optimize Risk Management in Unpredictable Markets

written blog

Empowering Women in Finance with a $20,000 Scholarship Award

written blog

ChatGPT: Does it have a place in the Capital Markets?

conference

FinTech Festival 2023

conference

Sibos 2023

on-demand webinar

Derivative Insider Webinar Series: Future Directions for Capital Markets Technology in the Digital/...