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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29 views

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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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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„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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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 ...
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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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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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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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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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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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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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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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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 ...