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Cheapest-to-Deliver (CTD) collateral methodology

Do you know where can I find details about this methodology? Theoretically, in cases where the CSA allows collateral to be posted in different currencies, the counterparty will always choose the ...
vsa's user avatar
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1 vote
1 answer
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Zero-recovery swap / extinguisher swap

Trying to understand the idea of a zero-recovery swap, for example, a xccy swap with a default clause that allows you to walk away without any future payment from either side if the counterparty ...
eMe's user avatar
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PFE "convergence"

I'm studying Counterparty Credit Risk. I was reading about Potential Future Exposure (PFE) and I've seen a lot of examples and graphs about how the PFE behaves (as the time horizon increases) for ...
Brownian Brownie's user avatar
2 votes
0 answers
51 views

No arbitrage principle in Counterparty Credit Risk

I think this is a fairly basic question but I'm struggling to understand the no-arbitrage principle applied to CCR. Imagine that we want to calculate the exposure evolution in an IR derivative, ...
vsa's user avatar
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1 answer
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Clarification of a term used in margin management by top counterparties

I am doing some primary research on margin management for different global counterparties and have come across the paper "The European central counterparty (CCP) ecosystem" by Armakolla et ...
Brian Smith's user avatar
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1 answer
165 views

What does the NPV of a CVA trade tell you

From the perspective of an XVA desk, what does the NPV actually tell you in terms of Counter-party Credit Risk? I understand that CVA + DVA gives you the NPV of any given trade (at the simplest level),...
AlejandroF's user avatar
0 votes
2 answers
152 views

seek clarification about PFE

I'm a software developer want to know a little about quant basics. My undserstanding of PFE is that a PFE of a trade at a future time point is commonly defined by taking the average of the highest (or ...
techie11's user avatar
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3 votes
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73 views

Close-out in practice: default settlements and counterparty models

Any model on counterparty risk for derivative contracts needs to make an assumption on the close-out convention, that is the rule used to determine at which value a defaulted derivative transaction ...
Daneel Olivaw's user avatar
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What makes the benefit of defaulted counterparty risk asymmetric in an interest swap?

On page 369 of Quantitative Risk Management (2015) by McNeil, Frey, and Embrechts, there is an interesting example that I do not quite understand. Suppose A makes a floating interest rate payment to B,...
J Pan's user avatar
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53 views

Calculating Counterparty Exposure of a collateralized Portfolio

What could be counterparty exposure on a portfolio where:- a. Client sells a put option on equity to us which is collateralized by corporate bond? b. Client buys a put option on equity from us which ...
vicky113's user avatar
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531 views

What happens to a Swap CCR if there is a mandatory breaking clause?

I doubt with regards to this. If for instance, we have the same two 5-year swaps one of them with a Mandatory Break clause in year one, what would be the differences in the CCR profile during the ...
vsa's user avatar
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Counterparty Risk [duplicate]

I am looking for some good text books for Counterparty risk management and measurement with many working examples. Could you please suggest few such books. Thanks for your help.
Daniel's user avatar
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1 answer
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Cash account growth in Burgard & Kjaer (2011)

I am rereading [1] and there is something I cannot get my head around this time. In Section 3, page 6 of the paper, they derive the growth of the cash account when the hedging portfolio includes the ...
Daneel Olivaw's user avatar
4 votes
3 answers
404 views

References for Counterparty Credit Risk, especially derivatives exposure

I fortunately landed an internship in Model Risk Management in one of the largest European Banks and now am looking for good references for Counterparty Credit Risk, especially derivatives exposure, ...
Max's user avatar
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2 votes
0 answers
272 views

Stochastic Volatility Models Real World Calibration

I am trying to find some research pertaining to the historical (or real world) calibration of stochastic volatility models. For example, in applications such as counterparty credit risk (IMM) or ...
VLT's user avatar
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2 answers
887 views

sign of CVA (Credit Value Adjustment)

I recently read chapter 14 of Gregory's The xVA Challenge. He defines CVA as (formula 14.2) $$ CVA = -LGD \cdot \sum_{i = 1}^m EE(t_i) \cdot PD(t_{i-1}, t_i), $$ where $LGD$ is the Loss Given Default, ...
Cettt's user avatar
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1 vote
1 answer
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In a cleared inflation swap agreement, what determines how much "collateral" a party needs to deposit into the third party escrow account?

Does realized inflation or expected future inflation determine how much money needs to be placed into the escrow account each day?
JorgeT's user avatar
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1 answer
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What is a counterparty risk trading desk

Can someone explains what does the above mentioned desk do? What are their responsibilities and how do they manage them, where do they fit into the rest of the organization?
Chen Ee Woon's user avatar
3 votes
1 answer
3k views

CVA - Where does the default probability (PD) come from?

Some authors use CDS from the market to derive the implied default probability (from a risk-neutral point of view). I wonder: how exactly does a CDS reflect counterparty risk? Let me put an ...
Pithit's user avatar
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7 votes
2 answers
993 views

Exposure calculation of a re-coupon swap

How to calculate the exposure of a recoupon swap (when the MTM of an i.r. swap is settled and the fixed rate is reset to the prevailing swap rate for the residual maturity). It's used to reduce the ...
Hedonist's user avatar
3 votes
0 answers
101 views

How to estimate quantitatively the settlement period?

The context of this question is Counterparty Credit Risk. In particular, the modelling of collateral for non-cleared OTC derivatives. Regulators require collateral amounts, such as Variation Margin ...
Nicolas Gutierrez's user avatar
1 vote
1 answer
900 views

Potential Future Exposure (PFE): Is there any Rigorous Walk Through with Data?

I have searched on the Internet and in several books (including John C. Hull and Jon Gregory) for concrete examples of Potential Future Exposure (PFE), but haven't had any success so far. I would ...
Ye Tian's user avatar
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5 votes
1 answer
3k views

CVA formula for a call option

I have a very quick question. Suppose that I buy a European call option from party S with expiry $T$. I want to determine the general formula for the CVA of the option, at time $t$. If I let $T_1\leq ...
RandomGuy's user avatar
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9 votes
2 answers
4k views

How to calculate the CVA of a forward contract?

I am having trouble calculating the CVA of a forward contract. The question is presented below Question: There exists a long forwards position underlying on gold with 2 years remaining. The ...
Gustavo Louis G. Montańo's user avatar
1 vote
1 answer
419 views

Bilateral Counterparty risk

Why do counterparty risk pricing adjustments need be considered in a bilateral counterparty risk perspective? Thanks
Sino's user avatar
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3 votes
2 answers
2k 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 ...
Elekko's user avatar
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1 vote
1 answer
871 views

CVA as a running spread - risk annuity calculation in the Monte Carlo framework

I have simulated future term structures in the one-factor Hull-White model and calculated the CVA of a particular trade (let's say, now I have it in absolute value, in dollars). However, I want to ...
QuackQuack's user avatar
4 votes
1 answer
160 views

Why are netted positions more volatile?

According to John Gregory, "netted positions are inherently more volatile than their underlying gross positions". Given the context, I think he's talking about close-out netting and not payment ...
AfterWorkGuinness's user avatar
10 votes
1 answer
758 views

Parametrizing the Radon Nikodym

The following is an excerpt from the dialogue in the book "Counterparty Risk and Funding - A Tale of Two Puzzles", regarding the statistics such as the volatility and correlation estimation under the ...
Gordon's user avatar
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7 votes
3 answers
2k views

Physical or Real-world Probability Measure

For counterparty credit risk, in particular, for potential future exposure computation, people use the real-world probability measure to evolve the underlying risk factors. My question is that whether ...
Gordon's user avatar
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3 votes
0 answers
786 views

How to calculate a the PFE for a Swaption?

How do you calculate the Potential Future Exposure (PFE) for a swaption? Do you incorporate the dynamics of implied volatility when you are running your simulations? Is there a standard way to ...
juinisoi78's user avatar
7 votes
1 answer
4k views

What happens if a custodian bank defaults?

This question follows up my answer and the related comment to this post and in general relates to counterparty risk. When you buy a financial asset, this asset goes in your account at your custodian ...
SRKX's user avatar
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14 votes
2 answers
1k views

Can you fully hedge an option in the presence of counterparty risk?

The derivation of the Black-Scholes model assumes no counterparty risk. Does the presence of counterparty risk invalidate the argument behind the model? EDIT: The question is about options in general,...
quant_dev's user avatar
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10 votes
2 answers
403 views

Do you know a good article on ETF's counterparty risk analysis?

I am at the moment considering investing into ETFs, but I am looking first to understand how these products really work. Indeed, it is my understanding that ETF can vary in terms of structure, thus ...
SRKX's user avatar
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