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5

I could not find any such detailed documentation after some weeks of looking (not non-stop obviously). It is appallingly documented. I do understand fully what it does though so am happy to field some questions on it if you like. In a nutshell, I can tell you it is a standard reduced-form credit model under a constant hazard rate (i.e. homogeneous Poisson ...


3

Your edit gets at the heart of the matter. When you enter a forward contract it generally should be very close to net zero current value. So credit risk for either side is negligible and should the counterparty immediately default one can likely reenter the desired position with a second counterparty near the desired strike so future uncertainty not a ...


3

Accounting data won't work for what you are looking for. The only way to do it is to look to public firms on same industry, similar growth stage, same regulatory/legal challenges and compute the volatility of those and use it as a proxy for your firm. It is the best you will be able to get, and it will be a bad approximation. The Merton and KMV models ...


3

I cannot suggest some reference particularly, since the field is going to develop day by day, but, generally, you could take a look to: Engelmann, Bernd, and Robert Rauhmeier, eds. The Basel II risk parameters: estimation, validation, and stress testing. Springer Science & Business Media, 2006. Particularly, look at the chapter 4 and 5; the ...


3

Firstly, the use of the logit models to estimate the PDs is particularly appreciated in some credit industries, as, for instance, the credit retail one. The logit model predicts pretty well the PD on loans, consumer credit, credit cards, ... and all concerns the retail consumer world. Mainly, those listed are the principal sub-industries in the credit ...


3

Firstly it's good to straighten out our goal. You correctly say, that IFRS9 requires analysis of expected losses. There are two components of expected losses. 1) Expected probability of a default event 2) Expected recovery rate So, not only do we need the probability but also the recovery rate. Luckily, both are approximated by the credit spread, which ...


3

In this context, I believe carry refers to the sum of "pure" carry + roll down. Carry, in the most general sense, is the return of a position in a static world; i.e., assuming time is the only variable that is changing, what's your holding period return on a trade? When you buy a bond, the "total carry" is the sum of 1) "Pure" carry – you get interest ...


3

This is, of course, a very old play. The main thing that gets in the way of trading it is that puts are rarely available in a quantity that matches typical credit instrument notionals. Here's a decent paper by Peter Carr on the topic, see equation (4) and surrounding.


3

CDX is available from Bloomberg at no extra cost, though they do not (so far as I know) form a total-return series that takes rolls into account. See, for example, CDX HY CDSI S19 5Y PRC Corp or Bloomberg ID CXPHY519.


3

The name for the model is Vasicek's single factor model. The model is very similar to CAPM: each asset has idiosyncratic and systemic risk with systemic risk driven by a single factor. Default occurs when an asset has a realization that is below some threshold. The level of this threshold doesn't matter; we can solve for it if we know the unconditional ...


3

This is an oft-debated topic among CVA/DVA professionals at banks. The key question, as pointed out by one of the comments, is whether a bank can derive some type of benefit from the increase in its own credit spread (and thereby make less of a CVA charge on the proposed transaction). The two sides to the argument are (a) on the one hand, surely by ...


3

One more thing that must be considered is the expected recovery rate. A model that ignores this rate is not tied to the real world. To estimate the probability of default, you would need to find the rate that needs to be applied to each time step/payment such that risk free discounting of payments yields the price of the bond. Specifically, Price = $\sum{P((}...


3

Assume : $R$ a recovery rate, a continuous payment a flat intensity $\lambda$ i.e $$\mathbb{P}(\tau>t)=e^{-\lambda t}$$ a flat discount rate $r$ With bonds prices Assuming JPM bond pays a coupon rate of $\kappa$ the risk free bond (being US bonds) pays a coupon rate of $\kappa^{risk~free}$ you have : $$\text{PV}(\text{Bond}_{JPM}) = \int_{0}^T ...


3

We construct a locally risk-free self-financing portfolio $X_t$, at time $t$, with $\Delta_t^1$ share of debt and $\Delta_t^2$ share of equity. That is, \begin{align*} X_t = \Delta_t^1 D_t + \Delta_t^2 E_t. \end{align*} Then, \begin{align*} dX_t &=\Delta_t^1 dD_t + \Delta_t^2 dE_t\\ &=\Delta_t^1\bigg[\Big(\frac{\partial D_t}{\partial t} + \mu A_t\...


2

Reuters uses a proprietary model defined StarMine structural/SmartRatios Credit Risk model that has been developed by themselves and provided with the Reuters data service. It does not exist a formal definition or paper about the model, in which it is explained how to get that score; Reuters simply explains roughly what is in its website without going into ...


2

let me try answer my own questions, partially, from below that are exerpted from FRM exam notes. So actually the K above, is UL, though it derives only from PD and maturity, but the G, N and 0.999, actually are calculating the VaR and UL. So, CAR is defined based on EAD and K, while K means UL. the essence is, CAR is to cover Unexpected Loss -- captical ...


2

Most, but far from all, companies maintain a relatively steady debt load. When a bond matures, they fund its principal payout with a new bond. Sometimes companies do take on more and more debt, meaning that CDS protection sold during earlier times of small debt loads becomes more valuable (and underpriced, from the point of view of the protection seller). ...


2

It depends on how one is thinking about the hedge. One might be thinking of it as A hedge against catastrophic risk (default of the issuer), or A hedge against changes in (market-implied) default intensity or hazard rate In the former case, which seems to be how you are considering it, the hedge is a static hedge, kept for up to 5 years, and insulates ...


2

As regards the free sources, the best place where you can find material about credit risk management is defaultrisk.com; it is a website where are collected (almost) all academic (and not) articles and working paper, references and researchers. Moreover, as regards the forums, I think you should try visiting Credit Risk Group at Linkedin; it is a very ...


2

The value of a long protection CDS is the value of the protection leg minus the value of the premium leg. As time goes, the premium leg value decreases since the # of premium payments reduces. However, the protection leg value will increase because of the survival probability reduces while the LGD is held the same.The exposure, which is the positive port of ...


2

"One of the attractive features of the logistic function is the fact that it is bounded between 0 and 1, making it suitable to represent probabilities. " "The Poisson intensity model introduced in this article still has serious shortcomings despite the major advancement offered by its dynamic features. First, it is known to be unable to properly capture the ...


2

If you provided a source for your definition of "credit exposure" and "wrong-way risk", we could probably give an answer more easily. Credit exposure is not "conditional on default". It basically represents how much a counterparty owes you at a given time $t$. When you compute the CVA, you usually assume that the correlation between counterparty credit ...


2

Economic Capital (EC) covers potential losses under normal conditions, whereas Regulatory Capital (RC) covers potential losses under stressed conditions. Thus, is not uncommon for the RC to be grater than the EC. If $T1$ is the bank's Tier 1 capital and $T1^*$ is the related minimum capital, we have $T1 = T1^* + EC$. I suggest reading Chapter 22 of Resti &...


2

I think it depends on your goals and how sophisticated you wish to be. At the lowest level, one can just take the spread of JPM over some relatively risk free rate (Treasurys or swaps) and declare that is the probability of default. Others (e.g. Elton, Gruber, et al in Explaining the Rate Spread on Corporate Bonds) try to measure the components. While ...


2

$$\text{Pr}[\tau_1>t,\tau_2\leq t,\tau_3\leq t]=\text{Pr}[\tau_2\leq t,\tau_3\leq t] - \text{Pr}[\tau_1\leq t,\tau_2\leq t,\tau_3\leq t]$$ $$\text{Pr}[\tau_2\leq t,\tau_3\leq t]=C(1,q_2(t),q_3(t))$$


1

The marginal CVA depends on every other trade in the netting set. This implies that adding a trade to the portfolio changes the marginal CVA of all the other existing trades in the portfolio. Why is that problem? Imagine you only charge the client for the marginal CVA of each new trade. Since adding a new trade changes the CVA allocated to previously ...


1

Crouhy, Mark and Galai's book Risk Management is about all aspects of risk management for investment banks, including credit risk of course. If you need to focus on one book, it is this one.


1

IMHO, I suggest you to read: Sironi, Andrea, and Andrea Resti. Risk management and shareholders' value in banking: from risk measurement models to capital allocation policies. Vol. 417. John Wiley & Sons, 2007. I studied that during the university for my risk management classes and I still find it enlightening and informative. The mathematics ...


1

You are confusing C-VaR and capital requirements for the credit risk of a counterparty. C-VaR is given by the Hull's formula you wrote, whereas what you call "Malz approach" is the calculation of the capital requirements. Check Hull - Risk Management and Financial Institutions p. 341.


1

I believe netting sets are usually provided as inputs to the algorithm in most-cases. If you were to kind of "guess" netting sets given different trades (in general) data, you could start by grouping them by counterparty. I'm not a legal specialist but my understanding is that counterparty here is to be understood as "legal entity" or something like that, ...



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