Capco: FX Volatility Adjustment for Risk Factors Simulation

This paper discusses a class of methodological issues that frequently arise in risk management systems such as PFE and CVA engines. Simplified methodology and shortcuts come at a price, sometimes a steep one. To account for model deficiencies and a disconnect between the calibration and the simulation modules, a number of adjustments to the risk factor simulation procedures must be made. As an example, FX volatility adjustment for risk factors simulation is considered. The impact on