# Tag Info

1

Depending on the bank and the country the bank operates in, regulators don't care about your bank's EC so you wouldn't have to hold 5+3; just 3 (or, if you are prudent/conservative, 5). In the US the regulatory capital requirements tend to be fairly conservative and I would think most banks have EC that is well below regulatory capital. Under the Basel ...

1

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 ...

0

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 ...

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 ...

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 ...

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If you're calculating trade-level CVA, wouldn't it be the equivalent of calculating CVA as if the trade had a 5y maturity instead of 10y?

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First, one needs a definition of exposure. I believe in this case the author is referring to PFE. If you are long CDS, you are paying premiums to receive protection from default. When default occurs, you receive a payout, and the value of your CDS contract is at a maximum. By definition of PFE, the exposure is at a maximum.

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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 ...

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 ...

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You find the IRC methodology paper written by Tim Xiao at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2426836

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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 ...

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