Credit and Counterparty Risk
About the Lecture
The lecture Credit and Counterparty Risk by Edu Pristine is from the course Archiv - Credit Risk (FRM). It contains the following chapters:
- Securities with Different types of Credit Risk
- Capital Structure
- Equity & Leverage Ratio
- Debt Seniorities
- Common Frictions in Credit Contracts
- Default
- Expected Loss
- Conditional Default Distribution Variance
- Single Factor Model
- Default Correlation & Beta Parameters
- Credit Rating
- Rating Migration
- Internal Ratings
- Credit Risk Models
- Counterparty Risk
- Merton Model
- Credit Factor Models
- Credit Value at Risk
Author of lecture Credit and Counterparty Risk
Edu Pristine
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Excerpts from the accompanying material
... Differentiate between book and market values for a firm's capital structure. Identify and describe different debt seniorities and their respective collateral structure. Describe common frictions that arise during the creation of credit contracts. Define the following ...
... equity, and default probabilities. Explain the drawbacks and assess possible improvements to the Merton Model, and identify proprietary models of rating agencies that attempt to address these issues. ...
... Basically, the only risky security that can default. Sovereign Debt – Consist of debt issued by central government, state government, municipal corporations and other government owned enterprises. Credit Derivatives – These are financial ...
... contains the market value of the various capital structure components. Where Et = Market value of equity At = Market ...
... Ratio and Leverage Ratio Company P Limited has assets of $500,000 ...
... debt is always repaid first followed by junior debt. Corporate debt sometimes contains the features of both debt and equity securities. ...
... assets of the firm as collateral. This claim is know as lien. Unsecured obligations have only general claim on the assets of the firm at the time of bankruptcy. Haircut – The amount lent to ...
... in firm's capital structure. Moral Hazard – This problem arises when buying protection reduces the incentive to avoid the protected event. Adverse Selection – This occurs when two parties have unequal information. Externalities – These are costs and benefits ...
... is termed as default. Default consists of both distressed exchanges and impairment. Probability of default – Likelihood that the borrower will default ...
... formula:- If LGD is given in dollar terms, then expected loss is given by formula: - 10 osure ...
... expected return from risky bond is more than the return from a risk free bond on risk adjusted basis. ...
... Based on its internal rating model, bank estimates that there is 4% probability that counterparty will ...
... on its obligations. Credit risk also arises due to credit downgrades. Market risk is the risk of losses due to adverse movement in market ...
... IBCA Investment Grade. Highest quality Aaa AAA AAA. High quality (very strong) Aa AA AA. Upper medium grade (strong) A A A. Medium grade Baa BBB BBB. Not Investment Grade. Lower medium grade (somewhat speculative) Ba BB BB. Low grade (speculative) B ...
... upon bond rating data from 1981–2000. Data is adjusted for rating withdrawals. Numbers in each row should sum to 100%. Due to round - off error, they may not do so exactly. Source: Standard & Poor's 15 Original Rating Probability of migrating to rating by year end (%) ...
... bond issuer might try to influence the credit rating agency for receiving a better rating. Due to this reason, many firms performs their own ...
... Credit risk models are used to asses the credit risk ...
... conditions must be satisfied: 1.Investment must be profitable. 2.Counterparty must be able to fulfill its obligations to the investor. ...
... netting and margin requirement. Netting is beneficial for both the parties as only the net amount of money needs to be paid. Margin is posted by both ...
... Custodial risk refers to the risk of default by the custodian. Rehypothecation – Sometimes brokers also provide custodial services. The margin or the collateral deposited by the client is ...
... to value to risky corporate debt. The assumptions of Merton Model are as follows: The firm has only one liability claim and it does not pay any ...
... The payoff for the debt holder is same as that of the risk free bond and short position in put option. At the time of maturity, if the VT > F, then the debt holders will receive F. At the time of maturity, if the VT < F, then the debt holders ...
... model, firm can default at the time only when the debt matures. Merton model can result in low default probabilities and high recovery rates for firms with high leverage. Merton model does ...
... market VaR in certain ways: -Credit Va R is usually calculated for longer time horizon and is generally around ...
