Deep learning for CVA computations of large portfolios of financial derivatives

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Abstract

In this paper, we propose a neural network-based method for CVA computations of a portfolio of derivatives. In particular, we focus on portfolios consisting of a combination of derivatives, with and without true optionality, e.g., a portfolio of a mix of European- and Bermudan-type derivatives. CVA is computed, with and without netting, for different levels of WWR and for different levels of credit quality of the counterparty. We show that the CVA is overestimated with up to 25% by using the standard procedure of not adjusting the exercise strategy for the default-risk of the counterparty. For the Expected Shortfall of the CVA dynamics, the overestimation was found to be more than 100% in some non-extreme cases.

Original languageEnglish
Article number126399
Pages (from-to)1-21
Number of pages21
JournalApplied Mathematics and Computation
Volume409
DOIs
Publication statusPublished - 2021

Keywords

  • Bermudan options
  • Deep learning
  • Expected shortfall
  • Portfolio CVA
  • WWR

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