Credit Derivatives Market - Counterparty Risk, Collateral Management and CVA - Regulatory Requirements on Counterparty Credit Risk

2013 ◽  
Author(s):  
Samuel Migus
Keyword(s):  
Credit Risk ◽  
Credit Derivatives ◽  
Counterparty Risk ◽  
Regulatory Requirements ◽  
Counterparty Credit Risk

Derivatives

2019 ◽  
pp. 157-198
Author(s):  
Alan N. Rechtschaffen
Keyword(s):  
Interest Rates ◽  
Foreign Currency ◽  
Credit Derivatives ◽  
Counterparty Risk ◽  
Treasury Bonds ◽  
Over The Counter ◽  
Futures Options ◽  
Counterparty Credit Risk ◽  
Stock Indexes ◽  
Versus Exchange

Derivatives provide a means for shifting risk from one party to a counterparty that is more willing or better able to assume that risk. The counterparty's motivation for assuming that risk might be to manage its own risk or to enhance yield (make money). Derivatives transactions may be based on the value of foreign currency, U.S. Treasury bonds, stock indexes, or interest rates. There are four types of derivatives contracts: forwards, futures, swaps, and options. This chapter discusses the following: counterparty credit risk, over-the-counter versus exchange-traded derivatives, shifting risk, types of derivatives, reduction of counterparty risk, suitability as hedging instruments, distinction between forwards and futures, foreign exchange forwards and futures, options, characteristics of swaps, and credit derivatives.

PRICING AND HEDGING OF PORTFOLIO CREDIT DERIVATIVES WITH INTERACTING DEFAULT INTENSITIES

2008 ◽  
Vol 11 (06) ◽  
pp. 611-634 ◽  
Author(s):  
RÜDIGER FREY ◽  
JOCHEN BACKHAUS
Keyword(s):  
Markov Process ◽  
Credit Risk ◽  
Credit Derivatives ◽  
Reduced Form ◽  
Counterparty Risk ◽  
Market Data ◽  
Portfolio Credit Risk ◽  
Default State ◽  
Default Contagion ◽  
Portfolio Credit Derivatives

We consider reduced-form models for portfolio credit risk with interacting default intensities. In this class of models default intensities are modeled as functions of time and of the default state of the entire portfolio, so that phenomena such as default contagion or counterparty risk can be modeled explicitly. In the present paper this class of models is analyzed by Markov process techniques. We study in detail the pricing and the hedging of portfolio-related credit derivatives such as basket default swaps and collaterized debt obligations (CDOs) and discuss the calibration to market data.

INFORMATIONALLY DYNAMIZED GAUSSIAN COPULA

2013 ◽  
Vol 16 (02) ◽  
pp. 1350008 ◽  
Author(s):  
S. CRÉPEY ◽  
M. JEANBLANC ◽  
D. WU
Keyword(s):  
Credit Risk ◽  
State Space ◽  
Cox Model ◽  
Credit Derivatives ◽  
Point Of View ◽  
Gaussian Copula ◽  
Copula Model ◽  
Counterparty Risk ◽  
Gaussian Distributions ◽  
Augmented State

In order to dynamize the static Gaussian copula model of portfolio credit risk, we introduce a model filtration made of a reference Brownian filtration progressively enlarged by the default times. This yields a multidimensional density model of default times, where, as opposed to the classical situation of the Cox model, the reference filtration is not immersed into the enlarged filtration. In mathematical terms this lack of immersion means that martingales in the reference filtration are not martingales in the enlarged filtration. From the point of view of financial interpretation this means default contagion, a good feature in the perspective of modeling counterparty wrong-way risk on credit derivatives. Computational tractability is ensured by invariance of multivariate Gaussian distributions through conditioning by some components, the ones corresponding to past defaults. Moreover the model is Markov in an augmented state-space including past default times. After a discussion of different notions of deltas, the model is applied to the valuation of counterparty risk on credit derivatives.

scholarly journals The Valuation of Financial Derivatives Subject to Counterparty Risk and Credit Value Adjustment

2020 ◽  
Author(s):  
Tim Xiao
Keyword(s):  
Credit Risk ◽  
Market Value ◽  
Financial Derivatives ◽  
Generic Model ◽  
Backward Induction ◽  
Counterparty Risk ◽  
Credit Risks ◽  
Common Mistake ◽  
Counterparty Credit Risk ◽  
American Style

This article presents a generic model for pricing financial derivatives subject to counterparty credit risk. Both unilateral and bilateral types of credit risks are considered. Our study shows that credit risk should be modeled as American style options in most cases, which require a backward induction valuation. To correct a common mistake in the literature, we emphasize that the market value of a defaultable derivative is actually a risky value rather than a risk-free value. Credit value adjustment (CVA) is also elaborated. A practical framework is developed for pricing defaultable derivatives and calculating their CVAs at a portfolio level.

scholarly journals The Valuation of Financial Derivatives Subject to Counterparty Risk and Credit Value Adjustment

2019 ◽  
Author(s):  
David Lee
Keyword(s):  
Credit Risk ◽  
Market Value ◽  
Financial Derivatives ◽  
Generic Model ◽  
Backward Induction ◽  
Counterparty Risk ◽  
Credit Risks ◽  
Common Mistake ◽  
Counterparty Credit Risk ◽  
American Style

This article presents a generic model for pricing financial derivatives subject to counterparty credit risk. Both unilateral and bilateral types of credit risks are considered. Our study shows that credit risk should be modeled as American style options in most cases, which require a backward induction valuation. To correct a common mistake in the literature, we emphasize that the market value of a defaultable derivative is actually a risky value rather than a risk-free value. Credit value adjustment (CVA) is also elaborated. A practical framework is developed for pricing defaultable derivatives and calculating their CVAs at a portfolio level.

Part III Investment Banking, 15 Counterparty Risk in the Trading Book

2018 ◽  
Author(s):  
Gleeson Simon
Keyword(s):  
Credit Risk ◽  
Market Value ◽  
Investment Banking ◽  
Future Price ◽  
Counterparty Risk ◽  
The Future ◽  
Counterparty Credit Risk ◽  
Degree Of Risk ◽  
Rules Set ◽  
Level Of Risk

This chapter sets out rules that result in certain exposures being treated as having a greater degree of risk than their actual mark to market value. In order to explain this, consider a bank which owns 100 of shares in A, but also has a derivative in place with X under which it is entitled to be paid the value of 100 shares in A. Both positions give rise to the same risk as to the future price of A, and both will be valued by reference to the value of the shares in A. However, if the value of the shares in A increases, the bank's credit exposure to X will increase. The rules set out in this chapter seek to capture this extra level of risk by treating the value of the derivative as being slightly higher than its mark to market value; thereby requiring a slightly higher level of capital to be held against it. This is the counterparty credit risk requirement (CCR).

scholarly journals Why protect financial markets?

2012 ◽  
Vol 2 (4) ◽  
pp. 25-39
Author(s):  
Maria Carapeto ◽  
Mauricio Acosta
Keyword(s):  
Credit Risk ◽  
Financial Markets ◽  
Risk Exposure ◽  
Counterparty Risk ◽  
The Third ◽  
World Markets ◽  
The World ◽  
Central Counterparties ◽  
Counterparty Credit Risk ◽  
Financial Transactions

The purpose of this paper is to estimate the benefits from adopting close-out netting to decrease the exposure to counterparty risk across the world markets and to establish the additional benefits from central counterparties towards decreasing counterparty risk. The novelty of the approach is to estimate a figure for counterparty credit risk (CCR) grouping together most of the financial transactions that generate counterparty risk and to analyze the benefit of netting possibilities in reducing the overall risk exposure, using three different scenarios. In the first scenario, counterparty credit risk is calculated assuming that no close-out netting is possible across different contracts. The second scenario assumes bilateral negotiations and netting across contracts. The third scenario contemplates the existence of a central counterparty as the center of transactions. Benefits from netting and central counterparty are assessed by comparing the risk exposure in each scenario. Results from the model show that netting provides a decrease in world counterparty risk of over $17 trillion. Netting is thus a powerful tool available in the world markets to manage counterparty risk while decreasing systemic risk, and as such policies to facilitate and standardize netting procedures across different jurisdictions should be encouraged. Moreover, results show that the use of central counterparties for settling the outstanding contracts would additionally decrease CCR by over $2 trillion.

scholarly journals The Valuation of Financial Derivatives Subject to Counterparty Risk and Credit Value Adjustment

2019 ◽  
Author(s):  
Tim Xiao
Keyword(s):  
Credit Risk ◽  
Market Value ◽  
Financial Derivatives ◽  
Generic Model ◽  
Backward Induction ◽  
Counterparty Risk ◽  
Credit Risks ◽  
Common Mistake ◽  
Counterparty Credit Risk ◽  
American Style

This article presents a generic model for pricing financial derivatives subject to counterparty credit risk. Both unilateral and bilateral types of credit risks are considered. Our study shows that credit risk should be modeled as American style options in most cases, which require a backward induction valuation. To correct a common mistake in the literature, we emphasize that the market value of a defaultable derivative is actually a risky value rather than a risk-free value. Credit value adjustment (CVA) is also elaborated. A practical framework is developed for pricing defaultable derivatives and calculating their CVAs at a portfolio level.

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