Defining Counterparty von Edu Pristine

Dozent des Vortrages Defining Counterparty

Edu Pristine

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... payments are not made. In case of conventional lending i.e. loans the principal amount at risk is known upfront and only the lender takes on the risk whereas in case of derivative contracts the value of underlying is uncertain resulting in a varying risk profile and both the parties take on the risk since it is possible for either ...

... and receive the repo rate. Haircut factor is usually applied to protect against decline in collateral value and will depend on the quality of the security and the liquidity present. OTC contracts include FX contracts, IRS contracts and CDS contracts. ...

... "netting" which reduces the CCR considerably. Credit Default Swaps contracts have a large CCR and can worsen further if accompanied by a Wrong way risk. Wrong way Risk occurs when there is a increase in credit exposure when the counterparty credit quality worsens i.e. ...

... till maturity. Current Exposure method is a crude methodology to compute the Credit Exposure for derivatives. Where Credit Exposure = MTM + PFE. In case of any collateral or margin, the same is removed to arrive at Credit Exposure Exposure = max (MtM, 0) Credit Migration refers to the change in credit quality of the underlying counterparty. Transitions are usually ...

... contract is unwound. Represents the present loss but does not remove the effect of netting, collateral or hedging. Represents the present value of expected inflows less the expected outflows. It is a approximate measure of replacement cost of a contract. In case of a default contracts are settled based on the MtM values. Default exposure is asymmetric since the party with a positive ...

... a counterparty default. Thus it refers to the positive MtM. EE > Expected MtM - Expected Positive Exposure (EPE) is the average EE through time. Effective EE is a measure to capture roll over risk for short term transactions. ...

... the each party's payment is computed and netted so only the counterparty which "owes" will make the payment. Netting depends on the legal terms between the counterparties, nature of payments and whether they can be easily offset. Cross product Netting for different contracts with same counterparty is possible but needs legal terms to ensure that risk is ...

... counterparty and recover losses by using cross product netting in case it has to pay the defaulted counterparty in closed-out contracts. Walkaway allows a party to cancel the transaction in case the counterparty defaults. Beneficial in case the party has a negative ...

... pricing contracts. However, failure of high quality counterparties like Bear Stearns, Lehman Brothers & insurers like AIG has really questioned the reliability of their ratings and the processes used to rate them by Rating Agencies. Most of the contracts were naked from credit risk perspective and were held by the Investment ...

... type of transaction (FX or IRD). CDS (Credit Default Swaps) can be purchased to hedge against CCR on the reference asset with the notional being the netted exposure. However, CDS will only protect against credit default whereas there is no payoff in case of a downgrade which widen MtM's. To cater this, tailored ...