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.
138
questions
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2answers
44 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 ...
0
votes
1answer
38 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) ...
2
votes
1answer
67 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 ...
0
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0answers
50 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 ...
3
votes
2answers
91 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, ...
1
vote
0answers
41 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 ...
2
votes
0answers
33 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 ...
3
votes
0answers
54 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:
...
0
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0answers
45 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 "...
1
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0answers
51 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(...
1
vote
1answer
56 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 ...
1
vote
1answer
54 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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votes
2answers
72 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?
4
votes
1answer
160 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 ...
0
votes
0answers
42 views
What models are used to determine credit limits for credit cards?
I have an upcoming job interview as a statistician for a firm that sets credit card limits. In preparation, I'm trying to learn how credit limits are determined.
I know that there are vast data-sets ...
0
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0answers
44 views
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 ...
1
vote
0answers
52 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 ...
0
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1answer
68 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 ...
0
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1answer
44 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)?
...
0
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0answers
68 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 ...
0
votes
1answer
76 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
votes
1answer
136 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 ...
1
vote
1answer
207 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 ...
1
vote
2answers
129 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 ...
2
votes
1answer
58 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 ...
1
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0answers
51 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?
1
vote
1answer
50 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
43 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
143 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
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0answers
45 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
127 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
532 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
190 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 ...
2
votes
1answer
118 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
43 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
72 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 ...
2
votes
1answer
193 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
249 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 ...
2
votes
0answers
56 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
190 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 ...
2
votes
0answers
34 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
126 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
281 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
99 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 ...
1
vote
0answers
41 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
543 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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0answers
61 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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0answers
103 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
939 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
45 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 ...
