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Estimating CVA and DVA Exposure Through an Options Portfolio’s Life

Article Quant Q&A · Author: user078913
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Summary

The document asks how to estimate credit valuation adjustment and debit valuation adjustment for a portfolio containing long and short FX options. The example assumes both options share an underlying and expiry. The author understands that current mark-to-market gives the initial exposure and that simulation can estimate positive or negative exposure at maturity, but wants to know how to calculate exposures at intermediate dates.

The text identifies the need to model exposure profiles over the life of the trades, rather than considering only inception and expiry. It does not provide a simulation method, literature references, numerical results, or details such as netting, collateral, counterparty default, or dependence between exposure and credit quality. It is therefore a focused question about exposure measurement, not a complete CVA/DVA procedure.

Key ideas

  • CVA and DVA estimation requires exposure estimates over the life of the trades.
  • The example portfolio contains offsetting long and short FX options with a common underlying and expiry.
  • Initial mark-to-market and simulated maturity exposure do not describe intermediate exposure by themselves.
  • The document asks for methods or literature but gives no calculation procedure.

Tags

OptionsForexRisk managementDerivatives pricingStatistics
Full text
# CVA for a portfolio of long and short options


# CVA for a portfolio of long and short options












I am looking to estimate the CVA/DVA for a portfolio of options.

For simplicity sake, let's assume there are two FX options in the portfolio, one long and one short. Both options have the same expiry and are on the same underlying.

I understand my exposure on day one is the current mtm and I can estimate the positive and negative exposure at maturity by running a simple simulation. I am however struggling two wrap my head around how I could calculate the positive and negative exposure during the life. Could someone point me to some literature where this is covered?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.