Exposure At Default During Financial Stress  A Comparative Study
(2016) FMS820 20161Mathematical Statistics
 Abstract
 In recent years the capital requirements for banks have been updated which has complicated
the pricing procedure for derivatives. Nordea has developed a proxy model that approximates
the risk measure Exposure At Default, which is an important component in the
recently updated requirements. The purpose of this thesis is to validate the accuracy of
Nordea’s model.
In order to fulfill this purpose, models for the Exposure At Default calculations are developed
and implemented in both the risk neutral probability measure and the real world
probability measure. Both models are based on time consuming Monte Carlo simulations.
To improve speed a third, analytical solution in the risk neutral probability measure, is developed
as well. The... (More)  In recent years the capital requirements for banks have been updated which has complicated
the pricing procedure for derivatives. Nordea has developed a proxy model that approximates
the risk measure Exposure At Default, which is an important component in the
recently updated requirements. The purpose of this thesis is to validate the accuracy of
Nordea’s model.
In order to fulfill this purpose, models for the Exposure At Default calculations are developed
and implemented in both the risk neutral probability measure and the real world
probability measure. Both models are based on time consuming Monte Carlo simulations.
To improve speed a third, analytical solution in the risk neutral probability measure, is developed
as well. The result shows that the two models in the risk neutral probability measure
converge towards the same value, as the number of simulations in the Monte Carlo model increases.
There is a difference in the results generated in the two measures which is assumed
to depend on the absence of the risk premium in the real world probability measure.
The final conclusion is that Nordea’s proxy model does not generate trustworthy results.
However, considering this conclusion, Nordea was able to improve their proxy model to
generate accurate results. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/studentpapers/record/8883843
 author
 Haglund, Susanna and Ripa, Julia
 supervisor

 Erik Lindström ^{LU}
 organization
 course
 FMS820 20161
 year
 2016
 type
 H2  Master's Degree (Two Years)
 subject
 keywords
 Exposure At Default, EAD, Interest Rate Swap, Kalman Filter, Monte Carlo, Real World Probability Measure, Risk Neutral Probability Measure, Vasicek Model.
 language
 English
 id
 8883843
 date added to LUP
 20160621 11:51:15
 date last changed
 20160621 11:51:15
@misc{8883843, abstract = {In recent years the capital requirements for banks have been updated which has complicated the pricing procedure for derivatives. Nordea has developed a proxy model that approximates the risk measure Exposure At Default, which is an important component in the recently updated requirements. The purpose of this thesis is to validate the accuracy of Nordea’s model. In order to fulfill this purpose, models for the Exposure At Default calculations are developed and implemented in both the risk neutral probability measure and the real world probability measure. Both models are based on time consuming Monte Carlo simulations. To improve speed a third, analytical solution in the risk neutral probability measure, is developed as well. The result shows that the two models in the risk neutral probability measure converge towards the same value, as the number of simulations in the Monte Carlo model increases. There is a difference in the results generated in the two measures which is assumed to depend on the absence of the risk premium in the real world probability measure. The final conclusion is that Nordea’s proxy model does not generate trustworthy results. However, considering this conclusion, Nordea was able to improve their proxy model to generate accurate results.}, author = {Haglund, Susanna and Ripa, Julia}, keyword = {Exposure At Default,EAD,Interest Rate Swap,Kalman Filter,Monte Carlo,Real World Probability Measure,Risk Neutral Probability Measure,Vasicek Model.}, language = {eng}, note = {Student Paper}, title = {Exposure At Default During Financial Stress  A Comparative Study}, year = {2016}, }