FX Volatility Adjustment for Risk Factors Simulation

13 Pages Posted: 14 Nov 2011 Last revised: 25 Jul 2017

Date Written: November 9, 2011

Abstract

This paper discusses a class of methodological issues that frequently arise in the risk management systems such as PFE and CVA engines. Simplified methodology and shortcuts come at a price, sometimes a steep one. To account for model deficiencies and disconnect between the calibration and the simulation modules, a number of adjustments to the risk factor simulation procedures must be made. As an example, FX volatility adjustment for risk factors simulation is considered. The impact on counterparty exposure numbers is quantified.

Keywords: Monte Carlo Simulation, Risk Engine, Volatility Adjustment, Counterparty Exposure

JEL Classification: G13, G15

Suggested Citation

Kondratyev, Alexei, FX Volatility Adjustment for Risk Factors Simulation (November 9, 2011). Available at SSRN: https://ssrn.com/abstract=1957210 or http://dx.doi.org/10.2139/ssrn.1957210

Alexei Kondratyev (Contact Author)

Abu Dhabi Investment Authority ( email )

Abu Dhabi
United Arab Emirates

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