The risk that a borrower will default on any type of debt by failing to make required payments and that the corresponding lender suffers a loss.

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7
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1answer
952 views

What makes IRC a market risk?

Since modeling leaves complete freedom we can assume both market and credit risks can enter the picture. However the minimum requirement is (migrations and) defaults simulation, how does this ...
6
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2answers
3k views

Is Unexpected Loss ever used in Basel II?

In Basel II, EL is useful. It's calculated as $$EL = PD \cdot EAD \cdot LGD $$ in advance IRB (internal rate-based approach), Correlation $$R = 0.12 \frac{1 – e^{-50 \cdot PD}}{1 – e^{-50}} + 0.24 ...
6
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5answers
141 views

Investment Grade Bond vs Junk Bond, whose duration is larger?

Just wondering how to calculate duration when take credit risk into consideration. I think if duration is calculated as weighted average of cashflow time, and weights are calculated using present ...
5
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1answer
167 views

Term structure of default probabilities without market data

With the forthcoming new regulations, IFRS9, financial institutions will be required to model life time expected credit losses. Consequently, it is necessary to model the term structure of default ...
5
votes
1answer
164 views

Calibration Merton Jump-Diffusion

Consider the following SDE $dV_t = rV_tdt +\sigma V_t dW_t + dJ_t$ where $J_t$ is a Compound poisson process with log-Normal jump size $Y_i$. How am I supposed to calibrate this model to CDS ...
4
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3answers
324 views

Default Probability Implied in Bond Prices?

Say I am trying to find the probability of default on JP Morgan implied by the price of their fixed income assets. Can this be done? Are there any pitfalls to this approach? I have heard of this ...
4
votes
1answer
244 views

What structural model does Reuters use for default probability?

When using Reuters, for each listed company there is credit tab that shows relevant information in terms of credit default. There is also rating class as well as one year default probability. It is ...
3
votes
1answer
1k views

Documentation of the ISDA CDS standard model

I have to validate the use of the ISDA CDS standard model. Don't understand me wrong - I am sure that the ISDA model is "good" I just need to know what it is in detail. I can download an ...
3
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2answers
60 views

Can Economic Capital cover Regulatory Capital?

If economic capital is set by the institution to cover unexpected loss (given a confidence level) and regulatory capital is set by the regulator, can one "absorb" the other? For example, if I ...
3
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1answer
1k views

Cost of Carry Bear Flattener

I was reading a report last week that “the carry on a 2s5s gilt curve flattener is negative to the tune of 10bp over 6 months” and I realised I have little understanding of this concept and ...
3
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1answer
92 views

CDS - Accumulated Default Risk?

Say I issue insurance contracts covering fire damage in personal households. Fires occur with a probability of $x$% in a household (and they obviously occur independently from one another). If the ...
3
votes
2answers
100 views

Mathematical definitioln of Potential Future Exposure

I have come across a risk measure called "Potential Future Exposure" and I have not really understood the meaning of it. Knowing that this has to do with counterparty credit risk, I read different ...
3
votes
2answers
144 views

Extracting Default probability from a single CDS

I have to find the CDS's default probability using the simplest Poisson Process (intensity constant). I'm wondering how to get this estimate if I have only a CDS with maturity 5years. If I had ...
3
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0answers
53 views

Modelling the Cost of Risk

I would like to read something about the cost of risk. Could anyone recommend some reference about how it is calculated or modelled?
3
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0answers
356 views

credit risk - How to calculate the probability of default (private companies)?

Part of my master thesis I am working with a company. I have the project to use their financial database with all the financials data (7 years) of approximately 3’000 companies. They have their own ...
3
votes
0answers
30 views

conferences for credit portfolio managers

What are worth conferences for credit portfolio managers? I appreciate your recommendations! PS:I am aware that this question is not the typical quant.SE question, BUT I couldn`t find reliable ...
3
votes
0answers
105 views

Pre- Versus post-2008 Crisis Rates Modeling

Modeling for interest rate derivatives (such as bermudan swaptions) is said to have undergone significant changes since the crisis. Prior to the crisis, counterparty default risk was often ignored, ...
2
votes
2answers
251 views

Credit risk data

I am trying to get historical data for credit risk and do some analysis on it as a school project. I thought CDX index might be a good proxy for typical credit risk data, but I am not sure. Typically ...
2
votes
1answer
82 views

A little help with the Single Factor model for credit risk

I'm studying the "single factor model" in Malz text "Financial Risk Management - Models, History and Institutions". He only refers to it as such and gives it no proper name. The model: $a_{i} = ...
2
votes
2answers
465 views

Hedging credit risk using Put equity options

I am looking for some paper or similar which deal with this topic: hedging bankruptcy on firm's debt using Put options written on that firm's equity price. This should be based on the assumption that ...
2
votes
1answer
71 views

Is credit exposure conditional on default?

Credit exposure defines the loss in the event of a counterparty defaulting, and expected exposure is the average of all credit exposures. BUT When adjusting the CVA calculation to account for ...
2
votes
2answers
259 views

Book recommendation for credit risk management for banking

What is a good beginner book on the topic of Credit Risk management for banking? I am a credit risk systems developer and most of my knowledge is in IT systems and programs that support the credit ...
2
votes
1answer
366 views

Hedging bond with CDS of different maturity

Say I buy a 10-year bond with a notional of 100k. To hedge my credit risk entirely I could buy a 10-year CDS, also on a notional of 100k. Now, if there are only 5-year CDS trading and no 10-year CDS, ...
2
votes
1answer
341 views

What is Margin of Conservatism

In modelling loss given default,(LGD), we often encounter the term Margin of Conservatism. What is it in layman's terms? I am not able to find a wikipedia page on this.
2
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1answer
57 views

The role of micro credit in finance

The concept of micro credit has been around for a while. Recall that Muhammad Yunus together with Grameen Bank were awarded the Nobel price in this context. I don't have references at hand but I ...
2
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0answers
42 views

Want to understand the links and relationship between all the risk metrics?

For Example : if Risk weighted asset (RWA) increased or decreased this month, which other risk metrics could have influenced RWA to increase or decrease. Also in different situations like, upward ...
2
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0answers
35 views

Future value of the debt under Merton model

The author Malz states the future value of the firm's debt under the Merton model can be found from: $$ D_{t} = D - \max(D - A_{t} , 0) $$ (where $D$ is the par value of the debt, $A_{t}$ is the ...
2
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0answers
125 views

Bayesian logit model in Psychometric or Behavioural Testing for Credit Scoring in Developing Countries

A lot of parameters in one title, I know. So there's credit scoring but not using credit history. Then there's using a Bayesian logit model. Then there's doing so in a developing country such as Haiti ...
2
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0answers
294 views

Obtaining the default probability and recovery rate for each credit rating?

I have the following questions for obtaining the credit rating: Given that I have cumulative default probability of each credit rating from Global Corporate Average Cumulative Default Rates ...
2
votes
1answer
78 views

Creditworthiness indicator for copula one-factor model

In this paper in equation 15 on page 261 dealing with one factor copula model, one is using creditworthiness indicator as one of a variables. It is defined as \begin{equation} Y_c = \sqrt{\rho_c} Z ...
1
vote
1answer
68 views

CVA using difference between 2 counterparty's spreads

The approximation to calculate CVA as a spread is $CVA = Spread * Expected$ $Exposure$. I assume this means the counterparty's spread over a proxy for the risk free rate such as LIBOR or OIS. Is this ...
1
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1answer
127 views

How to compute the volatility for the Merton's Model for Private firm?

After one day of research i did not figured how to compute the input volatility for PRIVATE COMPANY in order to calculate the PD. My goal is to compute the PD of each of my company in my portfolio, ...
1
vote
1answer
505 views

Actually benefiting from logistic regression to estimate probability of default

Does anyone know any events where using logistic regression to estimate probability of default has led to a bank, financial institution, government or anything really to benefit in practice? I see a ...
1
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2answers
80 views

Credit exposure of a long CDS

According to Gregory, the exposure for. the long party of a credit default swap increases in its early years and then skyrockets when there is a credit event of the reference entity. I would have ...
1
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2answers
121 views

CVA/CDVA - Worsened Credit Quality implies profit?

In the book Counterparty Credit Risk, Collateral and Funding by Brigo et al I found the following: credit quality of investor WORSENS $\Rightarrow$ books POSITIVE MARK TO MKT credit quality of ...
1
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1answer
118 views

CDO selling or buying credit protection?

I think there is an error in the Meissner text - Correlation Risk Modeling and Management and can't find an errata for this text to verify. On page 19 the foot note reads: Shorting the equity ...
1
vote
1answer
40 views

Can CreditGrades CDS Pricing Model be used for financial firms?

For Canadian banks, the CDS market is very illiquid and inactively traded. I want to get an estimate for the spread for a one year CDS on the Bank of Montreal. I was going to estimate this using the ...
1
vote
1answer
133 views

How are netting sets determined for CVA calculation?

In his book, Gregory describes a netting set as a set of trades that can be legally netted together in the event of a default Obviously, the netting agreements (as per ISDA master agreement) ...
1
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1answer
132 views

References for PD / LGD estimates of low-default portfolios

Any recommendations or reading sources for estimating individual PDs and LGDs for a set of low-default assets (souvereigns, investment grade corporates)? Since observing no defaults at all, regular ...
1
vote
1answer
117 views

What are the different Credit Portfolio Management models and what are their advantages?

CreditMetrics, RiskMetrics(Algorithims), etc. are all different risk methodologies used by many banks. However, what are their advantages/disadvantages? I would appreciate your replies!
1
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2answers
183 views

Counterparty risk tutorials

I want to learn about the latest methods used to measure credit risk, which I believe is same as counterparty risk. Can you please direct me some links for this. I have come across a few of them but ...
1
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0answers
18 views

Using Put Volatilities to Estimate Firm Leverage/Credit Risk

This paper by Hull, Nelken and White uses implied volatilities in structural credit risk models to back out a market-implied leverage ratio. CreditGrades has a similar implementation using equity ...
1
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0answers
34 views

Bayesian analysis in R: Probability of default, low default portfolios

I want to apply the knowledge of this paper (Bayesian estimation of probabilities of default for low default portfolios, by Dirk Tasche) in R, but I can't find the right bayesian package and functions ...
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0answers
12 views

Why use Moody's KMV EDF for one year

If I were to use Moody's KMV proprietary database with expected default frequqncies(EDF) for sectors and countries, along with aggregations for financials and non-financials, significant banks etc: ...
1
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0answers
21 views

Valuation Models for Bank Credit Default

What approaches exist for calculating a fair price for a credit default swap for a bank? Most of the traditional valuation models are geared towards industrial firms. Are there any theoretical ...
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0answers
44 views

How are CDS prices calculated for financial institutions?

If you need to estimate the fair price of a credit default swap on a financial institution, can it be done? Typical structural models tend to break down for the complex debt and asset characteristics ...
1
vote
3answers
392 views

How do right-to-break clauses affect CVA calculations

Does the presence of a optional/mandatory right-to-break clause affect CVA calculations, and if so, how? Given two (otherwise identical) 10y swaps with the same counterparty, one of which has a right ...
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0answers
91 views

Create Markets Bubble Indicator

I am trying to replicate a Bubble Indicator described here. The indicator is strictly based on calculating the regularity of price behavior to determine herding in multiple time frames. I tried the ...
1
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1answer
178 views

what is General IB2 Restriction in Basel II credit risk model

I was reading Basel II wiki page, it says: The first pillar The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: ...
0
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1answer
39 views

Why does the credit exposure of a forward increase with time

According to Gregory, the most obvious driving force behind credit exposure is future uncertainty. He characterizes the credit exposure of a forward contract as increasing with time; where exposure is ...