Exposure & CVA for Large Portfolios of Vanilla Swaps: The Thin-Out Optimization
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In this article we present an efficient optimization for calculating the exposure and CVA for large portfolios of vanilla swaps. It is based on a “thin-out” procedure applied to fixed payment streams, which reduces a very frequent stream of payments to a much less frequent one.
The procedure requires careful handling of the path-dependence that arises from the floating legs of the swaps. We compute the exposure and CVA for a large portfolio of fixed-for-floating swaps, and find that our approximation reduces the computation time for the portfolio to that of a single swap, with a roughly annual schedule. Moreover, the approximation maintains a particularly high accuracy.
Our technique is entirely model independent and can be applied to various instruments such as FX-forwards, cross-currency swaps etc.
Authors: Alexandre Antonov and Dominic Brecher
In this article we present an efficient optimization for calculating the exposure and CVA for large portfolios of vanilla swaps. It is based on a “thin-out” procedure applied to fixed payment streams, which reduces a very frequent stream of payments to a much less frequent one.
The procedure requires careful handling of the path-dependence that arises from the floating legs of the swaps. We compute the exposure and CVA for a large portfolio of fixed-for-floating swaps, and find that our approximation reduces the computation time for the portfolio to that of a single swap, with a roughly annual schedule. Moreover, the approximation maintains a particularly high accuracy.
Our technique is entirely model independent and can be applied to various instruments such as FX-forwards, cross-currency swaps etc.
Authors: Alexandre Antonov and Dominic Brecher
Authors
Dr. Alexandre Antonov
Dr. Antonov received his PhD degree from the Landau Institute for Theoretical Physics in 1997 and joined Numerix in 1998, where he currently works as a Senior Vice President of Quantitative Research. His activity is concentrated on modeling and numerical methods for interest rates, cross currency, hybrid, credit and CVA. Dr. Antonov is a published author for multiple publications in mathematical finance, including RISK magazine and a frequent speaker at financial conferences.
