Abstract: This chapter focuses on counterparty credit risk (CCR) for over-the-counter (OTC) contracts and how banks manage this exposure. The credit risk of counterparty can be broken down into two distinct components—the risk of loss due to the counterparty defaulting, and then the actual exposure, which will be the amount one would lose. The future exposure to a counterpart represents the risk of a loss arising from a potential default. The future replacement cost will depend upon the joint likelihood of default and the evolution of market variables such that the contract has a positive value. The potential future exposure on a derivative contract can be evaluated using three main techniques—Monte Carlo simulation, historic simulation, and analytical approaches. A rigorous treatment of CCR would involve addressing the correlation between credit and market risk. A credit loss will be sustained if the counterparty undergoes a deleterious credit change and the swap is in the money from the owner's perspective.
Publication Year: 2004
Publication Date: 2004-01-01
Language: en
Type: book-chapter
Indexed In: ['crossref']
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Cited By Count: 1
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