› › Measuring A Counterparty Credit Exposure To A Margined Counterparty

Measuring a Counterparty Credit Exposure to a Margined Counterparty

Author : Michael S. Gibson

Publisher :

Page : 40 pages

File Size : 23,8 MB

Release : 2005

Category : Derivative securities

ISBN :

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Book Description

Firms active in OTC derivative markets increasingly use margin agreements to reduce counterparty credit risk. Making several simplifying assumptions, I use both a quasi- analytic approach and a simulation approach to quantify how margining reduces counterparty credit exposure. Margining reduces counterparty credit exposure by over 80 percent, using baseline parameter assumptions. I show how expected positive exposure (EPE) depends on key terms of the margin agreement and the current mark-to-market value of the portfolio of contracts with the counterparty. I also discuss a possible shortcut that could be used by firms that can model EPE without margin but cannot achieve the higher level of sophistication needed to model EPE with margin.



Counterparty Credit Exposure. An Intuitive Guide to Credit Exposure Measurement

Author : Frederik Wulf

Publisher : GRIN Verlag

Page : 30 pages

File Size : 43,89 MB

Release : 2015-06-18

Category : Business & Economics

ISBN : 3956874889

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Book Description

Seminar paper from the year 2015 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 1,7, University of Hohenheim (Financial Management), course: Master seminary "Counterparty credit risk", language: English, abstract: The current interest in the topic of counterparty credit risk (CCR) and its exposure measurement began with the upcoming of the financial crisis, or to be more precise the bankruptcy of Lehman Brothers. Before then, the default of a counterparty of that size was out of the realm of possibility. The default of a counterparty that formerly was assumed as “too big to fail” prompted the need for a reconsideration of credit risk (Moser 2014, p. 429). Among the scope of topics associated with CCR, the determination of the exposure amount is seemingly trivial, but turns out to be highly complex due to the impact of risk mitigants, and the uncertainty involved. Canabarro and Duffie define counterparty exposure as the larger of zero and the market value of the portfolio of derivative positions with a counterparty that would be lost if the counterparty defaults and there is zero recovery. If the contract value is positive for the bank at the point of the counterparties’ default, the banks net loss equals the contract’s market value. If the contract value is negative, the bank does not gain anything but has a net loss of zero. From a regulatory point of view the Basel Committee on Banking Supervision (BCBS) aims to identify the exposure at default (EAD) which is up stake in the case of a counterparty’s default, which then has to be backed due to capital requirements. In this main section of the paper an indepth analysis on the characteristics of credit risk exposure and its quantification will be conducted. At first, the used metrics will be outlined, their characteristics described, and the risk mitigants netting and collateral considered. Last, it will be analyzed for which application the presented measures are suitable and whether they shall be calculated by riskneutral or historical data.



Modelling, Pricing, and Hedging Counterparty Credit Exposure

Author : Giovanni Cesari

Publisher : Springer Science & Business Media

Page : 257 pages

File Size : 33,81 MB

Release : 2009-12-06

Category : Business & Economics

ISBN : 3642044549

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Book Description

It was the end of 2005 when our employer, a major European Investment Bank, gave our team the mandate to compute in an accurate way the counterparty credit exposure arising from exotic derivatives traded by the ?rm. As often happens, - posure of products such as, for example, exotic interest-rate, or credit derivatives were modelled under conservative assumptions and credit of?cers were struggling to assess the real risk. We started with a few models written on spreadsheets, t- lored to very speci?c instruments, and soon it became clear that a more systematic approach was needed. So we wrote some tools that could be used for some classes of relatively simple products. A couple of years later we are now in the process of building a system that will be used to trade and hedge counterparty credit ex- sure in an accurate way, for all types of derivative products in all asset classes. We had to overcome problems ranging from modelling in a consistent manner different products booked in different systems and building the appropriate architecture that would allow the computation and pricing of credit exposure for all types of pr- ucts, to ?nding the appropriate management structure across Business, Risk, and IT divisions of the ?rm. In this book we describe some of our experience in modelling counterparty credit exposure, computing credit valuation adjustments, determining appropriate hedges, and building a reliable system.



Measuring Counterparty Credit Risk for Trading Products under Basel II.

Author : Michael Pykhtin

Publisher :

Page : 22 pages

File Size : 11,48 MB

Release : 2016

Category :

ISBN :

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Book Description

We described the treatment of counterparty credit risk of OTC derivatives under Basel II. According to this framework, minimum capital requirements for counterparty credit risk are to be calculated according to the corporate loan rules applied to the appropriate exposure at default (EAD) calculated at the netting set level. We present both Non-Internal and Internal Model Methods (IMM) of calculating this EAD. To obtain supervisory approval for the IMM, banks must be able to calculate expected exposure at the netting set level for a set of future dates. We also discussed a modeling framework that can be used for calculating exposure distribution at a set of future dates and, in particular, for calculating expected exposure profiles. This framework can be used for both regulatory and internal purposes. Additionally, we explained the treatment of margin agreements under the IMM that allows one to calculate the collateralized EPE measures: modeling collateralized exposure and the Shortcut Method. We discussed a general approach to modeling collateralized exposure that enables one to compute the collateral at a future date as a function of uncollateralized exposure at another date that precedes the primary date by the margin period of risk. Finally, we suggested a simple and fast method under this approach for modeling collateral that avoids the simulation of exposure at the secondary dates.



Counterparty Credit Risk, Collateral and Funding

Author : Damiano Brigo

Publisher : John Wiley & Sons

Page : 469 pages

File Size : 41,42 MB

Release : 2013-04-22

Category : Business & Economics

ISBN : 047074846X

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Book Description

The book's content is focused on rigorous and advanced quantitative methods for the pricing and hedging of counterparty credit and funding risk. The new general theory that is required for this methodology is developed from scratch, leading to a consistent and comprehensive framework for counterparty credit and funding risk, inclusive of collateral, netting rules, possible debit valuation adjustments, re-hypothecation and closeout rules. The book however also looks at quite practical problems, linking particular models to particular 'concrete' financial situations across asset classes, including interest rates, FX, commodities, equity, credit itself, and the emerging asset class of longevity. The authors also aim to help quantitative analysts, traders, and anyone else needing to frame and price counterparty credit and funding risk, to develop a 'feel' for applying sophisticated mathematics and stochastic calculus to solve practical problems. The main models are illustrated from theoretical formulation to final implementation with calibration to market data, always keeping in mind the concrete questions being dealt with. The authors stress that each model is suited to different situations and products, pointing out that there does not exist a single model which is uniformly better than all the others, although the problems originated by counterparty credit and funding risk point in the direction of global valuation. Finally, proposals for restructuring counterparty credit risk, ranging from contingent credit default swaps to margin lending, are considered.







Counterparty Credit Risk Modelling

Author : Michael Pykhtin

Publisher : Riskbooks

Page : 399 pages

File Size : 44,1 MB

Release : 2005-01

Category : Capital market

ISBN : 9781904339762

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Book Description

To enhance your understanding of the risk management, pricing and regulation of counterparty credit risk, this new title offers the most detailed and comprehensive coverage available. Michael Pykhtin, a globally respected expert in credit risk, has combed the industry's most important organisations to assemble a winning team of specialist contributors - presenting you with the definitive insider view.



Bounding Wrong-Way Risk in Measuring Counterparty Risk

Author : Paul Glasserman

Publisher :

Page : 16 pages

File Size : 46,81 MB

Release : 2015

Category :

ISBN :

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Book Description

Counterparty risk measurement integrates two sources of risk: market risk, which determines the size of a firm's exposure to a counter party, and credit risk, which reflects the likelihood that the counterparty will default on its obligations. Wrong-way risk refers to the possibility that a counterparty's default risk increases with the market value of the exposure. We investigate the potential impact of wrong-way risk in calculating a credit valuation adjustment (CVA) to a derivatives portfolio: CVA has become a standard tool for pricing counterparty risk and setting associated capital requirements. We present a method, introduced in our earlier work, for bounding the impact of wrong-way risk on CVA. The method holds fixed marginal models for market and credit risk while varying the dependence between them. Given simulated paths of the two models, we solve a linear program to find the worst-case CVA resulting from wrong way risk. The worst case can be overly conservative, so we extend the procedure by penalizing deviations of the joint model from a baseline model. By varying the penalty for deviations, we can sweep out the full range of possible CVA values for different degrees of wrong-way risk. Our method addresses an important source of model risk in counterparty risk measurement.



Counterparty Credit Risk

Author : Jon Gregory

Publisher : John Wiley & Sons

Page : 449 pages

File Size : 47,87 MB

Release : 2011-09-07

Category : Business & Economics

ISBN : 0470689994

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Book Description

The first decade of the 21st Century has been disastrous for financial institutions, derivatives and risk management. Counterparty credit risk has become the key element of financial risk management, highlighted by the bankruptcy of the investment bank Lehman Brothers and failure of other high profile institutions such as Bear Sterns, AIG, Fannie Mae and Freddie Mac. The sudden realisation of extensive counterparty risks has severely compromised the health of global financial markets. Counterparty risk is now a key problem for all financial institutions. This book explains the emergence of counterparty risk during the recent credit crisis. The quantification of firm-wide credit exposure for trading desks and businesses is discussed alongside risk mitigation methods such as netting and collateral management (margining). Banks and other financial institutions have been recently developing their capabilities for pricing counterparty risk and these elements are considered in detail via a characterisation of credit value adjustment (CVA). The implications of an institution valuing their own default via debt value adjustment (DVA) are also considered at length. Hedging aspects, together with the associated instruments such as credit defaults swaps (CDSs) and contingent CDS (CCDS) are described in full. A key feature of the credit crisis has been the realisation of wrong-way risks illustrated by the failure of monoline insurance companies. Wrong-way counterparty risks are addressed in detail in relation to interest rate, foreign exchange, commodity and, in particular, credit derivative products. Portfolio counterparty risk is covered, together with the regulatory aspects as defined by the Basel II capital requirements. The management of counterparty risk within an institution is also discussed in detail. Finally, the design and benefits of central clearing, a recent development to attempt to control the rapid growth of counterparty risk, is considered. This book is unique in being practically focused but also covering the more technical aspects. It is an invaluable complete reference guide for any market practitioner with any responsibility or interest within the area of counterparty credit risk.