Questions tagged [credit-risk]
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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Why does an interest rate derivative being in- or out-of-the-money influence the optionality of a multi-currency CSA?
Background
Consider a derivative contract with multiple cash CSAs, with the ability of the counterparty posting the collateral to switch to the cheapest-to-deliver (CTD) CSA.
Of the possible paths of ...
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34 views
Books on loans (car, house, etc…), pricing and securitization?
I'm looking for a good book on credit analysis, lending, car loans, house loans, etc... I would like to understand the theory and practice behind it. Most books I google for are for the consumer like ...
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34 views
Zero Volatility Curve (Z-spread) and Non-zero Volatility Curve (OAS)
When looking at credit risk for bonds, the measures that are often used -- depending on your purpose -- are the z-spread or the OAS spread. By definition, z-spread is the parallel shift from the zero-...
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33 views
„Backtesting“ of a Credit VaR Model
Coming from a market risk background, I am wondering how to validate / backtest a credit risk model in practice. Here, I am specifically not asking about the PD/migration validation, but about the ...
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2answers
73 views
ETF Arbitrage and Tracking: Impacts of a debt crisis
I am interested in the impacts of a debt crisis on the tracking ability of an ETF.
In particular I have read that the market makers for ETFs often take on large short-term loans in order to create or ...
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26 views
Robust way to calculate credit risky PV from CDS spreads
Suppose the credit risky present value of some future cash flow at time $T$ is to be calculated, and there are observable (market standard) CDS spreads on the obligor.
Now, I think that one could ...
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37 views
Multi-period Basel/Vasicek formula
I need to apply Basel/Vasicek formula to a 20-years horizon, both from a 20-years cumulative perspective and year-on-year basis.
Please find below the formula of the Basel Capital (ie. unexpected loss)...
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1answer
75 views
How to derive the expected loss from the credit risk of a bond?
I am trying to work out a formula to derive the expected loss from the credit risk of a bond.
My idea is to tie the credit risk to credit valuation adjustment and derive the expected loss from there, ...
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1answer
98 views
Does bond market trading price has recovery assumption in mind?
We all know fixed income seucirties have default risk which can be generated from CDS market. However, I am curious if the market trading price of a bond (say, $105) imposing any recovery assumption?
...
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17 views
How does rate expectations, rate volatility,firm value, and maturity effect credit risk?
I'm trying to understand several credit risk graphs seen in the FRM curriculum. The way the book goes it's hard to see how it ties together, so I'd like to try and do that now. The pictures are taken ...
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1answer
71 views
A model for probability of credit rating change for a single issuer
I am looking to model the probability of a single issuer upgrading or downgrading it's credit rating at some time using historical data. I have done research and everything I have found so far are for ...
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1answer
35 views
EAD = Drawn amount + Undrawn amount * CCF?
I am pretty sure the following is true
$$
\text{EAD} = \text{Drawn Amount} + \text{Undrawn Amount} \times CCF
$$
where $\text{CCF}$ is the credit conversion factor. It means if an overdraft line is ...
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11 views
Credit Migration: Risk [duplicate]
Hi I am given two tables of two tables showing data about fictional corporate business partners and relevant credit risk data – ID, rating, probability of default (PD, defined by rating), loss given ...
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1answer
96 views
Credit Migration Risk
I have a problem in which I have been given data for two periods over a set of customers.
Each set consists of the fields: ID, rating, PD, LGD, Exposure (on- and off-balance sheet exposures), EAD, RWA,...
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1answer
93 views
Bayesian analysis in R for 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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1answer
64 views
CRRA Ultility， simple question
for CRRA, does increasing gamma leads to increase in risk-aversion?
Looking at the curve, I think increasing gamma leads to less in risk-aversion (since the risk preimum is less). But in terms of ...
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53 views
CreditRisk+ spreadsheet implementation
I'm looking for an Excel spreadsheet where the CreditRisk+ model is implemented by means of a simple toy example, like the one the linked paper is referring to. If that spreadsheet is unavailable, I ...
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19 views
Crisis Impact on Credits by Type
I need to know what types of credits are more commonly harmed by times of financial crisis, for intance, during the 2008 crisis which type of credits where the frist to default and which the last.
...
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23 views
CVA for a portfolio of long and short options
I am looking to estimate the CVA/DVA for a portfolio of options.
For simplicity sake, let's assume there are two FX options in the portfolio, one long and one short. Both options have the same ...
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136 views
Black-Cox yield spreads
From Lando (2004)* I am trying to replicate the following figure (Section 2.6 Default Barriers: The Black-Cox Setup):
The spreads are computed as follows:
$$s(T) = \frac{1}{T}\ln\frac{D}{B_0}-r$$
...
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0answers
41 views
Where could I find code to compute Potential Future Exposure
Ideally code in SAS, R, Python or Matlab for calculations involving counterparties holding positions in energy markets on multiple price curves, with a Monte-Carlo methodology or a simpified ...
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13 views
Implied number of defaults in an Index CDS
Is there a standard way to imply the number of index defaults from index CDS pricing? For example, for the iTraxx XOVER index is it possible to infer the expected number of defaults in the index for 1 ...
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24 views
Individual Credit Risk Data - Probability of Default
Given the current coronavirus-induced financial crisis and the possibility that it evolves in an economical crisis trough Companies (See: Credit Is the Scariest Market to Watch, Not the Dow or S&P)...
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35 views
Derivation of the 99.9% CI to a 1 in a 1000 year event
Keen to understand how BASEL derived the 1 in a 1000 year event from the CI 99.9%:
The confidence level is fixed at 99.9% (0.999) (i.e. a bank is expected to suffer losses that exceeds its capital ...
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1answer
87 views
Marginal Probability of Default for Credit Risk
I am working on a model to predict credit defaults. We have worked out PD's of clients using logistic regression.
When calculating the default amount, we have to convert PDs to marginal PDs. The ...
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1answer
125 views
PDs for negative credit spreads
My question is about credit spreads and the corresponding probability of default (PD).
One of the most simple relations between credit spreads and PDs is (see e.g. ch7 in Malz(2011))
$$
PD \approx \...
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133 views
Frye Jacobs LGD function
I have a regression model that predicts the PiT (Point in Time) default rate (PD). Can we use this PiT
PD in the Frye Jacobs LGD function for making LGD forward looking ?
In addition, is the ...
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1answer
96 views
Linking PD and LGD
I am trying to solve the equation for PD but struggling to bring it to the LHS. Any ideas as to how I can do that?
$$ LGD = \frac{\Phi \left [ \Phi^{-1}(DR) - \frac{\Phi^{-1}(PD)-\Phi^{-1}(PD\cdot ...
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2answers
97 views
PD and LGD for ECL calculations needs to be time dependent?
I'm studying the implementation of an expected credit loss (ECL) model. I have encountered a complication. Do I need to calculate a probability of default (PD) and loss given default (LGD) with a time ...
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78 views
Quant valuation of a credit card debt (or flexible loan)
What would you say is the generally accepted quantitative method of valuing an individual credit card, or flexible loan? Is the method very changeable if that were a pool of such loans?
Suppose the ...
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24 views
What are the meanings of the CreditGrades model's variables?
I need to know the exact names of variables in the formulas regarding CreditGrades model. The formulas are in the CreditGrades technical document: https://www.msci.com/documents/10199/dd31bcce-6fe3-...
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2answers
107 views
TED Spread Replacement?
Will replacing the 3-month tenor of the US LIBOR with SOFR or CME 3-Month SOFR Futures work as well as an indicator of credit risk?
I have my doubts given:
SOFR reflects secured lending
LIBOR is ...
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1answer
50 views
Market vs. Credit Loss distributions: differences
If we define the Loss distribution of a portfolio as
$$L_{t+h}=-(V_{t+h}-V_{t})$$
where $V_{t}$
is the value of the
portfolio at time $t$ and $h$ is the time horizon, which are the (graphical) ...
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1answer
214 views
Credit VaR Formula
in Chapter 23 of Hull's Options, Futures, and Derivatives he has an example (i.e. example 23.4) which shows how the Credit VaR formula is applied. The answer in the formula is 0.128. I can't seem to ...
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230 views
PD calibration using Bayes formula
When calculating ECLs for loans under IFRS 9, one of the requirements is that the PD estimates have to be Point-in-time ($PD_{PIT}$) rather than through-the-cycle ($PD_{TTC}$).The setting is as ...
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2answers
207 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, ...
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103 views
Mapping FICO score to PD or Moody's Rating
I need to analyze the risk of a fund with various types of credits, such as consumer, student, and real estate. These categories all have FICO credit scores.
I need to assess the risk of the fund ...
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0answers
36 views
To price Municipal Bonds and risks I want to know the percent of unfunded pension liabilities ($3.8T) to total state and local gov liabilities
Unfunded pension liabilities keep growing and this seems alarming to both pension holders but also Municipal Bond holders.
I would like to know how large this problem is to better price Munis and ...
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0answers
68 views
Using transaction data to predict default of the customer
I am trying to build a prediction model that utilize the huge transaction database of all the customers of a bank. My dataset currently looks like this:
...
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106 views
Deriving the risk-neutral pricing formula for the 2-state credit risk model
I am reading Interest rate models by Cairns—specifically the chapter on credit risk. Cairns introduces first the simple 2-state continuous time Markov model for credit risk—with the two states being "...
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129 views
Normal default probability vs forward default probability/conditional default
is the diagram correct in calculating foward PD(conditional default) ? Or should the formula be
Probability of default = probability of survival x forward PD
Which of this is equal to marginal PD(...
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1answer
62 views
Relation between low rate and credit risk
In the Handbook of Fixed Incomes Securities, there is this part:
The lower federal funds rate prods banks to be less aggressive in
issuing deposits, such as certificates of deposits (CDs). Their ...
3
votes
1answer
111 views
Aggregation of $\rho$ and $p$ for a vasicek model
I'm currently facing the problem of how properly (analytically) adjust the parameters of an aggregated Vasicek (2002) loss distribution so that it has the same expected loss and 99% quantile as the ...
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2answers
266 views
default protection seller long or short credit risk?
A default protection seller is long/short credit risk?my guess it is short the credit risk, anyone can help clarify?
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1answer
182 views
Dominating credit risk modeling approaches for capital calculation in banks
In Basel/CRR (capital requirement regulation) there are various approaches for the estimation of capital requirements.
For corporate exposures there is the Foundations IRB approach (F-IRBA, own ...
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63 views
Extracting Risk Neutral Default Probabilities using Option Adjusted Bond Prices
I am currently in a project trying to quantify default risk premia for US Corporate Bonds. The data I have consists of bond prices, and other information (i.e. YTM, OAS, Effective Duration, Maturity ...
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1answer
158 views
PD for ECL modelling
I am trying to understand the interrelations between the marginal, cumulative and conditional PDs (Probabilities of Default) when modelling ECLs (Expected Credit Losses). My current understanding is ...
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1answer
87 views
Effects of hedges on counterparty exposure used for RWA computation
In the context of Basel 2 requirements (BCBS128), how hedges affect the computation of counterparty exposure used in RWA calculation? Specifically, do hedges reduce the amount of exposure (EAD)?
...
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1answer
90 views
When a bank enters a swap with a counterparty, when does it decide to use a OIS curve as its CSA Term, versus a counterparty specific “CSA Curve”?
What determines whether a swap should be discounted against a standard OIS curve VS a 'custom' CSA curve specific to the swap's counterparty? (such custom curves are marked as spreads to some base ...
2
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1answer
144 views
Calculating PD of commercial bank loan
I have two main options to calculate PD of a loan in a commercial bank; with and without machine learning.
On one hand, there are traditional methods such as Merton or KVM. On the other hand, I could ...
