Analytical Expressions to Counterparty Credit Risk Exposures for Interest Rate Derivatives

This paper proposes an approximate analytical solution method to calculate counterparty credit risk exposures.Compared with the Standard Approach for measuring Counterparty Credit Risk and the Internal Modeling Method provided by Basel Committee,the proposed method significantly improves the calculation efficiency based on sacrificing a little accuracy.Taking Forward Rate Agreement as an example,this article derives the exact expression for Expected Exposure.By approximating the distribution of Forward Rate Agreement’s future value to a normal distribution,the approximate analytical expression for Potential Future Exposure is derived.Numerical results show that this method is reliable and is robust under different parameters.