Potential Future Exposure Calculations of Multi-Asset Exotic Products using the Stochastic Mesh Method

Leslie Ng, Dave Peterson, Andres Eulogio Rodriguez

Abstract

ABSTRACT

We investigate the stochastic mesh method of Broadie and Glasserman to calculate potential future exposure (PFE) profiles used in counterparty credit risk management. This method is an alternative to the brute-force full-revaluation methods commonly used to calculate PFEs for portfolios of complex derivative products. Like its tree and finite-difference counterparts, the stochastic mesh method generates a state space of prices that can be used to calculate PFE by state-space sampling.We apply the method to generate PFE profiles for several multi-currency exotic products. In particular, we study variants of power reverse dual currency swaps using a multi-currency extension of the Hull-White model.