The previous chapter introduced a computational framework within which complicated payoffs can be specified and then simulated to obtain the price distributions required for credit exposure estimation. Trade specification is based on quantities we called statistics, which can be thought of as functions that return some financial quantity, given a simulated scenario. We will use these statistics later in Part III to specify various products.
This chapter is dedicated to a more detailed analysis of various statistics. We describe their implementation, the practical issues that arise, and the solutions we adopted. Since simulation is at the heart of our framework, we describe also various Monte Carlo schemes for simulating SDEs. We end the chapter by analysing the different types of errors introduced in the various steps of the modelling.
KeywordsEuler Scheme Bond Price Asset Class Asian Option Credit Derivative
Unable to display preview. Download preview PDF.