The lecture Mitigating Counterparty by Edu Pristine is from the course Archiv - Credit Risk (FRM). It contains the following chapters:
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... CCR loss is a function of Default probability, Loss given default and Exposure at Deafult. Mitigation is possible bilaterally under two way agreements where the mitigants apply to both the parties. In case of wide difference in credit quality of counterparties, ...
... collateral, cancellability conditions, set off clauses and can cover multiple transactions. Placing individual transactions under a single agreement with netting eliminates problems arising from differing treatments of ...
... They can be high quality counterparties (AAA/AA rated by credit rating agencies) which are unlikely to default. However, "Too Big to Fail" concept failed in 2008 crisis where the highest rated counterparties like Lehman, AIG, Fannie Mae defaulted. ...
... Useful since the replacement/unwinding cost may be high in case of a counterparty downgrade due to the MtM losses. No standardised trigger events and are negotiated between the parties. Triggers may be mergers, management changes, subsidiary bankruptcy, ...
... Not part of standard ISDA documentation. Potential gains for the institution from a counterparty default but worsens conditions further for the bankrupt entity. Additional cost for counterparty which must be compensated in pricing and also ...
... Netting reduces exposure but increases the volatility making exposure control more complex. Reduces the collateral requirements since only required for PFE. Entering into a offsetting transaction with same counterparty with netting eliminates market and ...
... Reduces the collateral requirements and results in better pricing terms. Close out and netting useful once the counterparty default and cash flows cease since they give the right ...
... options, FX options, swaptions, caps & floors only have a positive MtM since the entire premium is paid upfront. In case of instruments like long option without upfront premium, FX forwards and cross currency swaps paying currency with lower interest rate the possibility of negative MtM ...
... up of margin must be done in case the collateral value falls below exposure. Default risk is mitigated but market risk, operational risk, liquidity risk and correlation (wrong way risk) are created. ...
... Agreement covers all the terms like base currency, haircuts for collaterals, type of agreement (1 way or 2 way), minimum transfer amounts and rounding amounts. ...
... collateral that can be transferred and is typically used to reduce operational workload. Rounding is a collateral call or return amount which is rounded to a certain lot size to avoid small amounts. Margin Call Frequency refers to the periodic timescale ...
... Cash/FD have no haircut whereas other securities have haircut factors depending on asset price ...