A Parametric Approach to Counterparty and Credit Risk

Härtel, Maximilian und Orlando, Giuseppe (2013): A Parametric Approach to Counterparty and Credit Risk. SSRN

Abstract

In this paper, we present the results of a business solution on how to measure credit and counterparty risk with the main focus on OTC derivatives. Moreover, we use this approach to include the measurement of liquidity risk exposure.

We explain how we measure the exposure for each counterparty with netting arrangements and collaterals. Further we introduce the concept of PFE (potential future exposure) and explain why we opted for a parametric approach. We then develop the concepts of credit loss and default probability as a result of a Poisson process. Further we use the concept of unexpected loss in order to derive the economic capital as the difference between the unexpected loss and the credit loss. Finally we show how this approach can be applied as a refinement of liquidity risk measurement by considering collateral requirements, so as to enhance the monitoring of liquidity congruence between funds’ asset and liability, especially under stressed market conditions.

• Dokumententyp: Paper
• Fakultät: Mathematik, Informatik und Statistik > Mathematik > Finanz- und Versicherungsmathematik
• Themengebiete: 500 Naturwissenschaften und Mathematik > 510 Mathematik
• ISSN: 1556-5068
• Sprache: Englisch