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.
0
votes
1answer
13 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 ...
0
votes
1answer
19 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 ...
1
vote
0answers
22 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 ...
1
vote
0answers
33 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 ...
1
vote
0answers
51 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
1
vote
1answer
91 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.
...
4
votes
2answers
136 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 ...
1
vote
0answers
28 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 ...
2
votes
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 ...
1
vote
1answer
53 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 ...
1
vote
1answer
79 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 ...
2
votes
0answers
95 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 ...
0
votes
0answers
20 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 ...
2
votes
0answers
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 ...
1
vote
1answer
109 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 ...
1
vote
0answers
29 views
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 ...
0
votes
1answer
78 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 ...
0
votes
0answers
176 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)
...
2
votes
1answer
65 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 ...
0
votes
0answers
57 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 ...
0
votes
0answers
42 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 ...
1
vote
0answers
24 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 ...
1
vote
0answers
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 ...
2
votes
1answer
329 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 ...
1
vote
0answers
48 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?
1
vote
0answers
77 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 ...
1
vote
1answer
448 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{...
0
votes
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 ...
6
votes
0answers
49 views
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 ...
0
votes
2answers
290 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 ...
1
vote
0answers
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 ...
1
vote
0answers
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-...
1
vote
0answers
374 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 ...
3
votes
1answer
93 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^{\...
1
vote
2answers
115 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 ...
0
votes
1answer
5k 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 ...
-1
votes
1answer
225 views
Asset Swap Spreads
This is John Hull's book Options, Futures and Other Derivatives 9th Page 549
The process of calculating the ...
1
vote
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....
2
votes
1answer
273 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 ...
1
vote
2answers
59 views
Problem of PD estimation [closed]
Why is small number of defaults is a problem in case of PD estimation? What are the consequences? Can you recommend notes, books, etc about the topic?
0
votes
2answers
264 views
What Is the correct discounting, risky or riskless?
Suppose I can sell a European put in two ways: 1) in a mark to market collateralized market with collateral rate equal to the riskless rate $r$; 2) in a noncollaterized market where I get the payment ...
6
votes
1answer
416 views
How to compute the CVA on a swap with SPV?
If we have a swap with a bank and Special Purpose Vehicle (SPV), and the swap is un-collateralized , how do we estimate Credit Value Adjustment on the swap?
I will be able to get the Expected ...
1
vote
1answer
97 views
Integrating Credit and Market VaR
For a portfolio of fixed income, is there a framework or model for providing a VaR-type estimate that takes into account not only market risk factors, but also the loss associated with the probability ...
4
votes
1answer
108 views
What are the quantitative approaches to quantify credit risk for Private Equity and Real Estate?
What are some quantitative approaches to estimating credit risk for investments that aren't publicly traded, such as private equity and direct real estate? I'm particularly interested in estimating ...
1
vote
1answer
477 views
Interest Rate Swap Pre-Settlement Risk
I am kind of confused about how to approach the following question.
Suppose I enter into a interest rate swap (IRS) with counter party C.
Details are : Fixed rate rate receiver, floating rate payer :...
2
votes
0answers
179 views
CDO Implied correlation: what for?
Reading about CDOs and calibration to find the implied correlation, I came up with the following question.
Suppose we are pricing a CDO over a pool of $N=125$ names, using the usual Gaussian copula ...
2
votes
0answers
129 views
Derivative and Credit Risk Modelling
I am looking at acquiring a system to help with multi-instrument modelling. Across the spectrum Equity/FI/Swap/Repo/CDS/FxSwap/Forward/Future/etc for vanilla and more complex derivatives. The modeling ...
5
votes
6answers
11k views
What's the difference between credit risk and counterparty credit risk?
As the title reads, what is the difference between credit risk and counterparty credit risk? What are the key differences?
1
vote
1answer
332 views
Is exposure at default the same thing as the limit amount on a loan?
In Credit Risk terminology, is the Exposure at Default(EAD) the same thing as the total Credit LIMIT amount on the Loan? Because if Bank gives a loan with a limit of 10,000$ and the borrower has a ...
3
votes
1answer
1k views
Why is the overnight index swaps considered risk-free?
What I have understood is that the overnight index swap is bootstrapped to discount rates/zero rates that in their turn are considered risk free. The reason being, that the reference rate of such swap ...
