English

Quantum Counterparty Credit Risk: A Study of Path-Dependent Derivatives

Quantum Physics 2026-06-27 v1 Computational Engineering, Finance, and Science

Abstract

Estimating potential future exposure (PFE) for path-dependent derivatives, such as FX Target Redemption Forwards (TARFs), represents a formidable computational challenge due to the demand of nested Monte Carlo simulations. We present a hybrid quantum-classical framework that leverages Iterative Quantum Amplitude Estimation (IQAE) to address this via a reduced-order counterparty credit risk model. Our methodology maps the non-linear TARF payoff -- including cumulative gains and knock-out features -- into a quantum circuit via a two-step formulation, whereby a first-step percentile is computed classically and then used to condition quantum evaluation of subsequent exposure. We employ discretisation of the FX process and a linearised additive approximation of dynamics to enable implementation on current quantum platforms. Developed via the Classiq platform and validated on NVIDIA CUDA-Q and Amazon Braket SV1, our approach achieves relative errors of 1%-8% against classical benchmarks at the 97.5% and 99% confidence levels. While discretisation constraints and approximate monotonicity assumption may introduce bias and limit recovery of the full exposure distribution, our framework offers a tractable testbed for quantum acceleration. Scaling analysis suggests that \sim300 logical qubits could enable full 52-week exposure estimation, reducing sample complexity for tail-risk estimation via amplitude estimation at the cost of increased circuit depth.

Keywords

Cite

@article{arxiv.2606.28701,
  title  = {Quantum Counterparty Credit Risk: A Study of Path-Dependent Derivatives},
  author = {Sandeep Jha and Richard Oentaryo and Sanjay Sekaran and Vadym Kullish and Rajanikanth Annam and Paul Griffin and Hanan Rosemarin and Nadav Yoran and Nati Erez and Rei Sato},
  journal= {arXiv preprint arXiv:2606.28701},
  year   = {2026}
}