Abstract
The semi-analytical single-trade CVA calculations of the previous chapters are computationally very efficient, especially when closed-form option pricing formulas are available. However, when we need to compute CVA for a netting set of derivatives — which is the more common case — this option pricing approach quickly reaches its limits: We would need to come up with an option pricing formula for varying underlying derivative portfolios. While this may still be possible for sufficiently simple portolios, each portfolio/trade combination represents a new problem which requires customization, mapping or development efforts. When the portfolio is complex and contains structured products, closed-form option pricers are not available anymore, and we would have to resort to numerical techniques for the option price in each case. When the portfolio is collateralized, and CSA details have to be taken into account, semi-analytical approaches are not feasible anymore.
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