Building an accurate representation of firm-wide credit exposure, used for both trading and risk management, raises significant theoretical and technical challenges. In this talk we consider practical solutions to the problem of modelling, pricing, and hedging counterparty credit exposure for large portfolios of both vanilla and exotic derivatives. We start by presenting the main problems large Investment Banks face when computing counterparty exposure and we show how to define as generic modelling and valuation framework based on American Monte Carlo techniques. We describe how this modelling framework naturally leads to the definition of an architecture, which, with its modular design, allows the computation of credit exposure in a portfolio-aggregated and scenario-consistent way. An essential part of the design is the definition of a programming language, which allows trade representation based on dynamic modelling features. Finally we consider how to mitigate and hedge counterparty exposure. The crucial question of dynamic hedging is addressed by constructing a hybrid product, the Contingent-Credit Default Swap.

Short CV: Giovanni Cesari is Managing Director at UBS. He is the head of the portfolio-quant group, a front office team responsible for building models to compute and hedge counterparty credit exposure for the Investment Bank. Giovanni graduated from the University of Trieste and received his PhD from ETH in Zurich.

Other info:

http://www.springer.com/math/quantitative+finance/book/978-3-642-04453-3