As seen in previous articles of this series, the computation of XVA and counterparty credit risk metrics such as the expected exposure (EE) and potential future exposure (PFE) profiles requires a grid of market values at future dates and under various Monte Carlo scenarios.

In the previous article of this series, we illustrated how options with late-cash payment or with late-physical delivery are handled in XVA and CCR computations.

As seen in previous articles of this series, the computation of XVA terms and of CCR metrics such as the expected exposure (EE) or potential future exposure (PFE) profiles requires a grid of market values at future dates and under various scenarios.

In the previous articles, we have seen that the diffusion of risk factors and pricing of the trades are two key steps in XVA computations. In this one, we will see the arguments for or against each of these two possible approaches: the inconsistent approach, where the dynamics are different between diffusion and pricing, and the consistent approach, where the same dynamics are used for both diffusion and pricing.

In the previous article, we have introduced some common counterparty credit risk metrics such as the expected exposure (EE) and the potential future exposure (PFE) profiles. In this one, we present the typical shapes of those profiles for the most common interest rates and foreign exchange derivatives.