Foundations of the Standardised Approach for Measuring Counterparty Credit Risk Exposures
Author :
Publisher :
Page : 20 pages
File Size : 21,81 MB
Release : 2014
Category :
ISBN :
Measuring Counterparty Credit Risk for Trading Products under Basel II.
Author : Michael Pykhtin
Publisher :
Page : 22 pages
File Size : 46,39 MB
Release : 2016
Category :
ISBN :
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.
Measuring Counterparty Credit Risk
Author : Samuel Jacques Le Roux
Publisher :
Page : pages
File Size : 12,48 MB
Release : 2005
Category :
ISBN :
Book Description
The global over-the-counter derivatives market reached a staggering 14.5 trillion US dollars in gross market value at the end of December 2007. Although OTC derivatives are extremely useful and versatile in transferring risks, it appears to be a double-edged sword. For every derivative transaction concluded in the OTC market, there are two parties involved each of which is exposed to the other defaulting on the agreed terms and conditions of the contract. Counterparty credit risk is defined as the loss that will be incurred in the event that a counterparty fails to honour its financial obligations. This dissertation provides an overview of counterparty credit risk measurement from a theoretical point of view and puts an emphasis on the demonstration of the current solutions used in practice to address this problem. The author applies a bottom up approach to the problem by defining counterparty credit risk exposure on a contract (single-trade) level and expands this definition on a step-by-step basis to incorporate portfolio effects, such as correlation among underlying market variables as well as credit risk mitigation techniques, such as netting and collateral agreements, in measuring counterparty credit risk exposure on a counterparty level. The author also discusses related concepts which impact counterparty credit risk such as wrong-way risk and proposes an enhancement to the framework introduced by Finger (2000) for incorporating wrong-way risk into existing measures of counterparty credit risk exposure. Finger's framework is enhanced by the introduction of a structural model approach which can be used in establishing a functional and intuitive relationship between the probability of default of the counterparty and the underlying market variable to the derivative contract under consideration. This approach is also applied to a typical South African situation through the use of Monte Carlo simulation. The topic of counterparty credit risk modelling is a very relevant topic in modern finance, especially since the advent of Basel 2 which this dissertation also touches on in terms of the applications of counterparty credit risk modelling and how this relates to the minimum regulatory capital requirements set by bank regulators. Copyright.
Counterparty Credit Exposure. An Intuitive Guide to Credit Exposure Measurement
Author : Frederik Wulf
Publisher : GRIN Verlag
Page : 30 pages
File Size : 26,72 MB
Release : 2015-06-18
Category : Business & Economics
ISBN : 3956874889
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.
International Convergence of Capital Measurement and Capital Standards
Author :
Publisher : Lulu.com
Page : 294 pages
File Size : 45,52 MB
Release : 2004
Category : Bank capital
ISBN : 9291316695
Book Description
Counterparty Credit Risk
Author : Eduardo Canabarro
Publisher :
Page : 356 pages
File Size : 47,72 MB
Release : 2009
Category : Derivative securities
ISBN : 9781906348342
Book Description
This book is a collection of cutting-edge reflections and ideas on methods and practices used to measure, price and manage OTC derivative counterparty risk.
Measuring a Counterparty Credit Exposure to a Margined Counterparty
Author : Michael S. Gibson
Publisher :
Page : 40 pages
File Size : 10,78 MB
Release : 2005
Category : Derivative securities
ISBN :
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 Risk Modelling
Author : Michael Pykhtin
Publisher : Riskbooks
Page : 399 pages
File Size : 39,65 MB
Release : 2005-01
Category : Capital market
ISBN : 9781904339762
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.
Counterparty Credit Risk
Author : Jon Gregory
Publisher : John Wiley & Sons
Page : 449 pages
File Size : 10,52 MB
Release : 2011-09-07
Category : Business & Economics
ISBN : 0470689994
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.
Modelling, Pricing, and Hedging Counterparty Credit Exposure
Author : Giovanni Cesari
Publisher : Springer Science & Business Media
Page : 257 pages
File Size : 38,29 MB
Release : 2009-12-06
Category : Business & Economics
ISBN : 3642044549
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.
