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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14 views

Observed rating migration matrix to derive the generator matrix

I am doing some reading on the derivation of credit rating migration/transition matrices and probability of default term structures. I understand that a homogeneous Markov chain can be either discrete-...
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27 views

What are the CVA risks on a EUR/USD cross-currency swap 10y with Vodafone?

Can anyone tell me how I can approach solving this? What risks do I need to understand and quantify? A colleague has given this as an exercise to help me learn. Currently looking through the xVA ...
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First-passage model - foreign currency

Hey I have question about first-passage time models in credit risk. Say that the barrier is of the form $B(t)=D_0e^{0,05}e^{-\gamma (T-t)}$ for some constant $K,\gamma>0$. Then if we borrow (in ...
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31 views

For a bond, what is the formula for expected loss?

The expected loss equals PD * LGD * EAD, meaning probability of default times loss given default times exposure at default. I get how we can get PD and LGD, but what is the exposure at default (EAD) ...
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99 views

Calculation of the Probability of Default

I am reading a book from Tiziano Bellini namely IFRS 9 and CECL Credit Risk Modelling and Validation, to understand the default probability calculation (link : https://www.sciencedirect.com/science/...
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185 views

Reduced form of credit model

The price for a simple credit bond, where a credit event is modeled as the first jump of a Poisson process $N$, with stochastic hazard rate $\lambda$, is given by $$P_t = P(t, \lambda, N)$$ such that, ...
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28 views

Measuring stressed credit risk

What are good ways of measuring stressed credit risk specifically? I know usually we just "stress" all market conditions, but are there credit-risk specific things we can do? Or is it just a ...
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37 views

Default Probability estimation

Can you please provide some workout references on how to estimate the Default probability for Wholesale portfolio? How does it defer from Retail portfolio case? I ...
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What are Statistical methodologies practically used in Slotting approach as prescribed by EBA for specialized lending?

While preparing the Rating Tools (used to underwrite) specialized loans (project finance, object finance etc.), Underwriters go by their expert knowledge. Experts can identify the risk drivers and ...
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119 views

Exposure At Default: Calculating the present value

In this numerical example, I can't figure out with which numbers (when using the PV formula) to calculate exposure at default (EAD) as shown in the table. The EAD is the value of the discounted future ...
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1answer
72 views

IFRS9 - Lifetime Expected Credit Losses (ECL) Probability of Default (PD) - how do they get distributed in quarters?

Let's assume we calculate a Lifetime ECL of 5 years. How do we then distribute the expected losses in each of the following 20 quarters? Do we just divide the lifetime ECL by 20 and calculate the ...
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49 views

Model Validation Aggregation Documentation (Binomial, Hosmer-Lemeshow, Tolerance) - Credit Risk et cetera

I came across some document that says for a PD (Probability of Default) model in order to assess its accuracy you need to first look at the Binomial Test, then the Hosmer-Lemeshow Chi-square test, ...
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99 views

Probability of Default calculation

I am looking for some good resources with handful of workout examples, on the modelling of the Probability of Default under IFRS9...
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101 views

Estimation of Default Probability using Merton's model

There is an explanation of Risk Neutral Default Probability using a Firm's Equity price here - https://www.mathworks.com/help/risk/default-probability-using-the-...
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37 views

Estimation of Default Probability from Bond

Typically the formula to calculate the default probability from corporate Bond looks like $\frac{S}{1-R}$ where $S$ is the ...
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3answers
123 views

Bond prices and probability of default

We learn in Finance 101 that the price of a bond is the present value of future cash flows. There is no mention of default risk. Still, bond prices move each day, without a change in the payment ...
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35 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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37 views

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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45 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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99 views

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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39 views

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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41 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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1answer
148 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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117 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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1answer
76 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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106 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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1answer
112 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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104 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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1answer
77 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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115 views

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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19 views

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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31 views

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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149 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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45 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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28 views

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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36 views

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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1answer
127 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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1answer
148 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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1answer
99 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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146 views

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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81 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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157 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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51 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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279 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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386 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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268 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, ...