BBVA and US based startup Zapata Computing have just released the results of a research project into the use of quantum algorithms applied to the Monte Carlo method, which allows predicting the evolution of different variables under random conditions. In the paper, the research team focused on a particular use case, credit valuation adjustment (CVA), and identified opportunities and challenges towards quantum advantage for practical instances.
Monte Carlo simulations are widely used in the financial industry in everything, from policy making and risk assessment processes to financial product pricing calculations. “We wanted to understand whether quantum computing could help us improve how we approached these calculations, starting with a very specific problem that can be solved using Monte Carlo, such as the calculation of credit valuation adjustments”, said Andrea Cadarso, head of Quantitative & Business Solutions at BBVA Mexico, in a statement.
As of today, establishing the valuation and pricing of certain derivative products remains a daunting task: “Finding the right price of derivatives can prove difficult. On certain occasions, it requires taking into account additional costs in this price, such as the other party’s default probability. Since the financial crisis of 2007 there has been a growing interest and a new regulatory push to take these types of credit risks into consideration in financial agreements,” he added.
Despite its potential, the use of this technology for achieving a more efficient way of calculating prices of derivative products and making valuation adjustments will still require further developments in the available hardware.