We consider a Heston type inflation model in combination with a Hull–White model for nominal and real interest rates, in which all the correlations can be non-zero. Due to the presence of the Heston dynamics our derived inflation model is able to capture the implied volatility skew/smile,...

We study the impact of wrong-way-risk (WWR) on credit valuation adjustment (CVA) for European and Bermudan options, based on an intensity model. WWR is modeled by a dependency between the underlying asset and the intensity of the counterparty's default. We consider three different models. We...

We present a pricing method based on Shannon wavelet expansions for early-exercise and discretely-monitored barrier options under exponential Lévy asset dynamics. Shannon wavelets are smooth, and thus approximate the densities that occur in finance well, resulting in exponential convergence....

This paper enhances a well-known dynamic portfolio management algorithm, the BGSS algorithm, proposed by Brandt, Goyal, Santa-Clara and Stroud (Review of Financial Studies, 18, 831-873, 2005). We equip this algorithm with the components from a recently developed method, the Stochastic Grid...

The regulatory credit value adjustment (CVA) for an outstanding over-the-counter (OTC) derivative portfolio, is computed based on the portfolio exposure over its lifetime. Usually the future portfolio exposure is approximated using Monte Carlo simulation, as the portfolio value can be driven by...

Credit Valuation Adjustment (CVA) has become an important field as its calculation is required in Basel III, issued in 2010, in the wake of the credit crisis. Exposure, which is defined as the potential future loss on a financial contract due to a default event, is one of the key elements for...

When Fourier techniques are employed to specific option pricing cases from computational finance with non-smooth functions, the so-called Gibbs phenomenon may become apparent. This seriously impacts the efficiency and accuracy of the pricing. For example, the Variance Gamma asset price process...

We develop a Fourier method to solve rather general backward stochastic differential equations (BSDEs) with second-order accuracy. The underlying forward stochastic differential equation (FSDE) is approximated by different Taylor schemes, such as the Euler, Milstein, and Order 2.0 weak Taylor...

This paper presents a computationally efficient technique for the computation of exposure distributions at any future time under the risk-neutral and some observed real-world probability measures, needed for computation of credit valuation adjustment (CVA) and potential future exposure (PFE). In...

In the search for robust, accurate and highly efficient financial option valuation techniques, we here present the SWIFT method (Shannon Wavelets Inverse Fourier Technique), based on Shannon wavelets. SWIFT comes with control over approximation errors made by means of sharp quantitative error...