At this seminar, we shall give you a good and practical understanding of methods and tools for measuring, pricing and managing the complex credit exposures that arise from transactions in OTC derivatives, security financing and various off-balance arrangements.
We start with general introduction to counterparty risk. We contrast this type of risk with traditional lending risk, and we give examples of transactions that give rise to counterparty risk exposure. We also present and discuss a number of case studies involving counterparty failures.
We then look at how counterparty risk can be identified and measured using a simple add-on method and a more comprehensive method where “potential future exposure” is quantified using an integrated model for market and credit risk. We demonstrate how simulation techniques can be used to generate loss distributions and to calculate Expected Exposure (EE), Expected Positive Exposure (EPE) and other important analytics.
Further, we explain how counterparty risk can be effectively managed. Methods include active counterparty credit monitoring, use of counterparty position limits, margining and the use of collateral. We also discuss the legal and operational risks that arise from using collateral and other arrangements. We explain and demonstrate how portfolios of OTC derivatives are “credit valuation adjusted” to take into account the relative credit qualities of the counterparties and how these adjustments should be taken into account in derivatives pricing.
Finally, we give an overview of regulatory and industry developments towards creating a better infrastructure that should lead to a reduction in counterparty and systemic risk. Initiatives include clearing facilities for OTC derivatives, improved accounting standards, and enhanced monitoring and risk management, and strengthened capital standards.