7
votes
What's the difference between credit risk and counterparty credit risk?
Both 'credit risk' and 'counterparty credit risk' refer to the same type of risk, i.e. the risk that the opposite side of a contract will not honor its obligations to repay.
But 'credit risk' will be ...
6
votes
Accepted
Why do we need to split market and default information into 2 separate filtrations?
I think you are absolutely correct if the hazard rate is deterministic, although I think you are forgetting a discounting factor in your example. But sometimes the hazard rate cannot be assumed to be ...
6
votes
Why investment grade floor is set at Baa3/BBB-?
The differences in credit risk between Moody's Baa2 versus Baa3 versus Ba1 versus Ba2 are all comparable. People would pay much less attention to agency ratings had the regulators not forced them to. ...
6
votes
The difference between Credit Curve and CDS Curve
You should split this question into several.
The same debtor can have slightly different credit curves for different products and tiers, eg 1at lien loans, senior unsecured bonds, subordinated... it'...
5
votes
Does bond market trading price has recovery assumption in mind?
The price of a defaultable bond is driven by 3 things:
the observable interest rates
the probability of default
the price of the bond after a default (or, equivalently, the loss given default)
The ...
5
votes
Why do we need to split market and default information into 2 separate filtrations?
Your ${\cal F}$ is actually ${\cal G}$, that is the already enlarged filtration/probability space. So, the claim here seems to be that we do not have to consider the smaller, market filtration, ${\cal ...
4
votes
What's the difference between credit risk and counterparty credit risk?
I think the accepted answer gives the right insight, but I would like to add a further consideration: the difference between credit and counterparty risk is related to the main risk you are seeking ...
4
votes
Accepted
How does one make money from CVA (Credit Valuation Adjustment)?
Assuming zero recovery, let $\mathcal{C}$ be a counterparty you are facing on a derivative deal with value $V(t)$ and maturity $T$ such that $V(t)\geq 0$, for example an option. Let $CDS_\mathcal{C}(t,...
4
votes
Accepted
EAD = Drawn amount + Undrawn amount * CCF?
Your equation is right. There are 2 ways to write EAD:
EAD = Drawn + a x Undrawn; or
EAD = a x Limit.
In both equations, a is called CCF but it is derived/estimated differently depending on which ...
4
votes
Accepted
Estimation of Default Probability using Merton's model
As you see in the third equation on that Mathworks page, the Merton model postulates that the value of equity equals the value on a residual claim on a company's assets after the creditor has been ...
4
votes
Why do bank stock returns increase from increased credit risk?
Your “Credit Risk” variable sounds like it should be more accurately described as “Credit Spread”, which proxies the risk of loans. As credit spreads increase, the risk of the loans a finance company’...
4
votes
CDS spread changes with its recovery rate
Whether you want the different recoveries to keep the constant hazard rate (equivalently probability of default, probability of survival) or constant mark to market (upfront) depends on why you're ...
4
votes
How to account for the credit spread ( e.g. LIBOR + 2%) when using the Multicurve Methodology in valuing a Swap
1 ) Spread is for fwd only
4 ) Discounting is SOFR in any case (if using dual curve). See here for some details. That said, FF OIS still exists, but even this curve is discounted by SOFR and applies &...
4
votes
Accepted
seek clarification about PFE
Potential future exposure (PFE) is a concept in credit analysis, that is we are investigating the risk that a counterparty will not be able to pay us in the future.
In a typical derivative deal ...
4
votes
Why investment grade floor is set at Baa3/BBB-?
Yeah, default rate jumps considerably. For example in following, mid value of default rate jumps from 1% to 7.5 % :
"COMMISSION IMPLEMENTING REGULATION (EU) 2016/1799 of 7 October 2016 laying ...
4
votes
Where to find historical data on corporate credit ratings
I found this link with a lot of parsed data
http://ratingshistory.info/
3
votes
Accepted
How to compute the CVA on a swap with SPV?
The assets of the SPV constitute a single corporate loan. Therefore the probability of default and LGD of the bond can be estimated from the CDS market for that corporate. Now the SPV defaults if ...
3
votes
Accepted
Calibration Merton Jump-Diffusion
Hi am having to write as an 'answer' as am new to forum.
We used stochastic intensity models on desk from a while back. Generally Black-Karasinski to avoid negative hazard rates (and for useful ...
3
votes
For IFRS9, losses should be discounted with the EIR, why is that sensible?
1. $V_0$ is what the bank would write for it's book value
This is only the case for items held on the balance sheet at Fair Value. Most banks will hold many assets/loans at amortized cost (principal ...
3
votes
Accepted
Mark to Market of a CDS Contract and Risky Annuities
ok so if you sell a CDS for 100bp and then the market moves to 90bp, you have a profit of 10bp. But how much is that actually worth in dollar terms? Suppose you then buy the CDS for 90bp, what have ...
3
votes
Accepted
rationale for maturity adjustment formula in basel IRB formula
The maturity adjustment is there to take into account the risk of changing default probabilities in future years. Parameters are according to Basel calibrated from "observed... capital market data". ...
3
votes
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"?
To trade a swap counterparties must have an ISDA Master Agreement drawn up and signed between themselves.
If collateral is to be exchanged that agreement will also contain a section called a CSA: a ...
3
votes
Accepted
Dominating credit risk modeling approaches for capital calculation in banks
The EBA performs the HDP (high default portfolio) and LDP (low default portfolio) benchmarking exercises, which would be relevant. You can find it on their website. Here are a couple of examples:
...
3
votes
Accepted
Aggregation of $\rho$ and $p$ for a vasicek model
You can first compute the average PD - few choices would be:
Simple average of the individual PDs
Exposure weighted average of the PDs
If the PDs range is too large, then you might want to bucket ...
3
votes
sign of CVA (Credit Value Adjustment)
This was originally meant as a comment but was too long to be considered as such.
It's all a matter of convention but I would agree with you that there is a sign problem.
If you look at it from the ...
3
votes
Credit VaR Formula
Here is the excel formula with steps:
=NORMSDIST((NORMSINV(0.02)+NORMSINV(0.999)×SQRT(0.1))/SQRT(1−0.1))
=NORMSDIST((−2.054+3.09×SQRT(0.1))/SQRT(1−0.1))
=NORMSDIST(-1.135)
=12.8%
They keep ...
3
votes
TED Spread Replacement?
You are correct. SOFR is an overnight, secured lending rate. It does not have an unsecured credit risk element , and it does not have a term premium. As a result, it is expected to behave ...
3
votes
Accepted
TED Spread Replacement?
I think it's a good question. But just remember a few nuances:
They both do have futures, so you can get exposure to future rates. For example, you can trade June Eurodollars now as well as June ...
3
votes
PD and LGD for ECL calculations needs to be time dependent?
I assume that you calculate ECL in the context of IFRS9 -correct?
market practice often follows the following approach:
estimate a TTC PD/LGD (TTC = through the cycle). This corresponds to your ...
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