# 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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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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### 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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### 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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### 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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### 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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### 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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### 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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### 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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### 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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### 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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### 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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### 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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### 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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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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### 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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### 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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### 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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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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### 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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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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### 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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### 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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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 ...
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{...