Fast Calculation of Credit Exposures for Barrier and Bermudan options using Chebyshev interpolation (1905.00238v1)

Abstract: We introduce a new method to calculate the credit exposure of Bermudan, discretely monitored barrier and European options. Core of the approach is the application of the dynamic Chebyshev method of Glau et al. (2019). The dynamic Chebyshev method delivers a closed form approximation of the option prices along the paths together with the options' delta and gamma. Key advantage is the polynomial structure of the approximation, which allows us a highly efficient evaluation of the credit exposures, even for a large number of simulated paths. The approach is highly flexible in the model choice, payoff profiles and asset classes. We compute the exposure profiles for Bermudan and barrier options in three different equity models and compare them to the profiles of European options. The analysis reveals potential shortcomings of common simplifications in the exposure calculation. The proposed method is sufficiently simple and efficient to avoid such risk-bearing simplifications.