Two measures for the price of one
Simulating exposures under the real-world measure followed by repricing under the risk-neutral measure is computationally intensive and dangerous shortcuts are often taken. Here, Harvey Stein combines the real-world measure with the risk-neutral measure and presents a risk analytics methodology that speeds up the calculations by orders of magnitude
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The dichotomy between risk analytics and pricing is well known among financial practitioners and researchers. For risk analysis, such as computing value-at-risk and credit exposures, expectations of future values must be computed under the real-world measure. For pricing, expectations are computed under the riskneutral measure (Dash 2004; JP Morgan 1996; Markowitz 1952; Stein 2013).
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