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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Equivalent of recovery rate

I'm trying to understand the functioning of "recovery of face-value" approach. Let $V_t$ the fair-value, that is the price that the holder of a defaultable bond must pay for hedging of default of ...
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40 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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40 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
28 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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63 views

What are the go-to textbooks for advanced quant finance topics? [duplicate]

Credit risk, interest rate modelling, volatility modelling. What are the go-to books for each of these 3 topics in quant finance? The target audience should be someone who understands the basics of ...
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61 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 ...
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1answer
126 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 ...
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1answer
42 views

rationale for maturity adjustment formula in basel IRB formula

For capital requirement, rwa is computed as a product of terms including a K (unexpected losses). (As shown is the summary from wikipedia : https://en.m.wikipedia.org/wiki/Advanced_IRB ) K is ...
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89 views

Financial Statement Analysis [closed]

So i have just completed a beginners course on understanding financial statements. As part of the final assignment, we are supposed to pick a real company, study its financial statements and conclude ...
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29 views

Connections between logistic regression, information value and Kullback-Leibler

I am new to credit risk modeling, my background is in mathematics and physics, so I am looking to justify some commonly used techniques from first principles. Suppose that we are interested in ...
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27 views

Exposure at Default (EAD) models with and without the Credit Conversion Factor (CCF)

Exposure at Default (EAD) models with and without the Credit Conversion Factor (CCF). What are the pros and the cons of each, and which one should use a small commercial bank?
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30 views

A quick and dirty loss distribution and Credit VaR

I need to create a loss distribution for a credit portfolio as the first steps to estimate the portfolio Credit VaR. I have historical monthly account snapshots (payment history) of all accounts ...
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28 views

Calculate the implied loss rate on a loan, given the interest charged

My bank has a retail credit portfolio of 100 million in loans. I know the payment history,balance history of all these loans since inception. Are there any tools to calculate an expected loss, a loss ...
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50 views

Need to solve the stochastic differential equation of Vasicek Model

How to solve the stochastic differential equation of the Vasicek model for the analysis of credit risk? I search in the article "The Distribution of loan portfolio value" (Vasicek) but he doesn't ...
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35 views

Gaussian copula: contract price

The hazard rates for A and B are 1% and 2% respectively. A contract pays you $1 if A defaults earlier than B. What is the correlation that minimizes the price of the contract? I have not studied the ...
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76 views

Spread Duration weighted OAS vs. Mkt Cap Weighted?

I am curious what the differences might be in rolling up OAS spreads across a portfolio by duration weighting vs. mkt cap weighting. @Alex yes I meant S.D. weighted not Duration weighted
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216 views

Deriving default probability from CDS spread via stripping

I am currently trying to derive the cumulative probability of default from a CDS spread where the LGD is 30% and there are quarterly premiums including the accrued premium. ...
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2answers
154 views

How does one make money from CVA (Credit Valuation Adjustment)?

I am new to Quantitative Finance but have been doing a lot of reading on Counterparty Credit Risk. I understand the definition of CVA being: "the difference between the risk-free portfolio value ...
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35 views

How to measure effectiveness of CDS hedging

In a fixed income emerging markets portfolio investing in Sovereign and Corporates, CDS on governement bonds are used for hedging credit risk. To be clear CDS are used to hedge both the exposure of ...
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2answers
36 views

Are Credit Default Swaps used by B2B Service providers or Vendors?

I understand CDS's are often employed in trading strategies between institutions - That is well publicized. What isn't as publicized is how other customers might look to use a CDS. I work in an ...
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1answer
59 views

Proper maturity in the Merton's model

I am working on a credit rating project using Merton's model. Basically it adopts Black-Scholes that equity value can be viewed as a call option with a strike price of face value of debts. Since the ...
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1answer
125 views

Intuition behind one factor Merton model for probability of default?

Let $Z$ be a standard normal rv, $Y_i$ be iid standard normals for $i = 1,\dots, n$, satisfying the relationship $$ X_i = \sqrt{p} Z + \sqrt{1-p} Y_i $$ In the one factor Merton model, we say that ...
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162 views

Duration adjusted credit spread

I am currently reading two policy papers that construct, for a fixed-income bond, a following credit spread: This one, p. 12, computes the yield to maturity minus the Overnight Index Swap (OIS) rate ...
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24 views

Collateralized Bond Obligations History

Collateralized Bond Obligations (CBOs) were a form of CDOs that were more popular in the early 2000s. I am looking for: Historical loss rates on their tranches (if available) Whether historically any ...
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54 views

Pricing default risk in cryptos

I'm looking to figure out how to price "insurance" against a counter-party defaulting in an OTC cryptocurrency transaction. I think the first measure would be to calculate VaR? I'm planning on ...
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1answer
126 views

Credit Spreads and Relative Value : floating vs fixed bond

I would like to study if, in these weeks during the italian credit crisis, floating govy bonds were more resilient than fixed govy bonds. For each floating issue (CCTS) I chose the fixed issue with ...
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Any Suggestion for Credit Risk Measure for Banking Industry in Turkey?

I need a measure that will proxy for overall credit risk in the banking industry of Turkey. The literature offers LIBOR-OIS spread and Moody's Baa-Aaa spread as strong candidates. However, these ...
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1answer
89 views

Calculating the long run average default rate when the portfolio changes during the year

The Basel rules prescribe to calculate a long run average default rate (LADR). It is stated that his rate should be calculated as the average of yearly default rates. A first idea what be: look at ...
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206 views

How Machine Learning model addresses adverse action concerns -credit scorcard?

How to find the variables involved in the decision to report adverse action when the origination scorecard is developed using Machine Learning - XGBOOST with monotonic constraints (80 variables) ...
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1answer
74 views

Implied credit spread convertible bonds with negative yield

I’m trying to understand what happens to the credit spread of a convertible bond when yields of the convertible are negative. I’ve heard there is an implied credit spread as spreads can’t really be ...
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72 views

CreditGrades model calibration and initial values

Currently doing a project on structural models, and I want to apply the CreditGrades model. My question is what values are the parameters going to take, in order to update the implied probability of ...
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43 views

Debt per share in CreditGrades model

In order to specify the debt per share in the CreditGrades model one has to specify the liabilities to be included from the firm's balance sheet. I do not have access to the technical document ...
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26 views

Altman Z-Scoring and unknown variables [closed]

Assume we have the known Altman Z-Scoring model $Z= 0.012X_1 + 0.014X_2 + 0.033X_3 + 0.006X_4 + 0.999X_5$ But the variables $X_i ,i=1,2,3,4,5$ are unknown. Is it statistically correct to make an ...
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38 views

How are Risk indices linked to Physical Trading returns?

Ref to my previous question here: Physical trading spot transaction analysis-Quantified I have been able to narrow down my aim to defining a physical trading strategy P&L. My question is, how ...
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1answer
391 views

credit risk - marginal default probability

I have been working on an assignment trying to calculate marginal/conditional probability of default. Using a logistic regression framework, I was able to compute the 12-month unconditional PD for ...
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51 views

How can I find what Loss Given Default to use

I want to come up with the appropriate loss given default for a commodity derivative in my CVA calculation. would anyone know where I can find this information?
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81 views

Implementing Pykthin Multi-factor adjustment

I've made a mistake in the implementation of Pykthin Multi-factor adjustment which I'm fairly certain comes from me not understanding the model completely. The model was developed to drastically ...
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1answer
605 views

Mark to Market of a CDS Contract and Risky Annuities

From JP Morgan's Trading Credit Curves 1 and we have that: The MTM of a CDS contract is (for a sell of protection) therefore: $$\text{MTM} = (S_{\text{Initial}}-S_{\text{Current}}).\text{...
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1answer
42 views

Heuristic (or algorithm) for calculating a risk premium, given a probability of default and a “minimum” profit margin (expressed as a yield)

Assuming that I have means of determining and calculating the following metrics: Risk (i.e. probability*) of a default to a particular borrower as P Profit margin of X% The profit margin is taken to ...
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Quantitative and regulatory aspects of portfolio integration in IRB credit portfolios

Say bank A buys a credit portfolio "B" (e.g. corporate loans or retail mortgage, ...) from bank B. Bank A fulfills the the requirements of CRR (capital requirement regulation) for its existing ...
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2answers
319 views

Merton model for Probability of Default - What liabilities?

In Merton structural model for credit risk (74), the company's Assets and Liabilities are used to imply the default probability of the firm. At the end, we don't need to know the assets value, and ...
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26 views

Why do supervisors deem qualified revolving retail less risky than other retail exposure

I would like to gain more understanding of the economic background of some Basel formulas. In the Basel guidelines in retail credit risk we have a risk weight function that depends on the correlation ...
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22 views

Modelling Specialised Lending deals

This question by itself is less a quant question but it has impact on the quantitative model to use. In 2006 CEBS gudilines we find a definition similar to this: Specialised Lending (SP) is a sub-...
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404 views

What is credit risk in a private equity portfolio?

If I am a private equity fund manager (e.g I have a portfolio consisting of direct private equity investments), what does credit risk mean in a practical sense for me? The usual issuer credit risk ...
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1answer
94 views

Simplifying an expectation function of default time and rates

I have the following expectation to calculate : $$ \mathbf{E}\left[ e^{\int_{t_0}^{\tau} r_s ds} \mathbf{1}_{\{\tau < T\}}\right] $$ More precisely, I want to show that : $$ \mathbf{E}\left[ e^{\...
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2answers
125 views

Choosing a proxy for asset credit event correlations

I'm interested in modeling the joint likelihood for rating changes and default events across a portfolio of bonds. To estimate the correlation between these assets, I can use a third-party factor ...
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1answer
6k views

Discount Curve Vs Forward Curve

This could be a trivial question, but would I like to clear the concepts. Our firm started sourcing the Murex Trades which has all the variety of Derivative products. I noticed that the Curve ...
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1answer
253 views

Asset Swap Spreads

This is John Hull's book Options, Futures and Other Derivatives 9th Page 549 The process of calculating the ...
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1answer
2k views

How to calculate credit spread from rating

I've been trying to calculate the credit spread of a financial institution with a Fitch rate of A. By using the transition matrix (https://www.fitchratings.com/web_content/nrsro/nav/NRSRO_Exhibit-1....
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1answer
293 views

CDS Vs Credit Risk premium over risk free

Credit default swap is the premium you pay to protect against a credit default from your borrower. Would it be equal to the credit premium over risk free i.e. bond yield - risk free of comparable ...