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Chapter 5: Counterparty Willi Brammertz / Ioannis Akkizidis

Unified Financial Analysis Risk & Finance Lab. Chapter 5: Counterparty Willi Brammertz / Ioannis Akkizidis. Table of Content. Introduction. Data. Credit Exposure. Credit Value Adjusted. Provisioning (IFRS 9). Stress Scenarios and CVaR. Input elements Counterparties.

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Chapter 5: Counterparty Willi Brammertz / Ioannis Akkizidis

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  1. Unified Financial Analysis Risk & Finance Lab Chapter 5: Counterparty Willi Brammertz / Ioannis Akkizidis

  2. Table of Content Introduction Data Credit Exposure Credit Value Adjusted Provisioning (IFRS 9) Stress Scenarios and CVaR

  3. Input elementsCounterparties

  4. Counterparty and Behavior • Counterparty has descriptive and modeling part • Descriptive part (Data) • Characteristics • Hierarchies • Links to financial contracts • Credit enhancements • Behavioral (statistical nature) • Probability of default • Recovery rates • Recovery patterns • Used at default

  5. Table of Content Introduction Data Credit Exposure Credit Value Adjusted Provisioning (IFRS 9) Stress Scenarios and CVaR

  6. Relational Structure CID LEI MOC CTi MOC CID CID LEI MOC Contract Data Probability of Default Data Migration Matrix Book Keeping Data Valuation Model Parameters Counterparty Data RT Market Data CR-Spreads PDi CPi RT RT Prov

  7. Guarantee Obligor CNTRL: OBL Guarantor Borrower Contract(s)

  8. Collateral(CloseOutNetting) Obligor CNTRL: CLO Collateral Borrower Contract(s) Contract(s)

  9. Table of Content Introduction Data Credit Exposure Credit Value Adjusted Provisioning (IFRS 9) Stress Scenarios and CVaR

  10. Three steps to expected loss • Exposure at default EAD: Gross exposure – credit enhancements = EAD • Loss given default LGD:EAD * (1 - recovery rate) = LGD • Expected loss EL:LGD * probability of default = EL • Different data quality in each step: separation necessary • Rating agencies: mix the three steps (subprime) • PD‘s must reflect uncollateralized junior debt

  11. Three steps to expected loss • Exposure at default EAD: Gross exposure – credit enhancements = EAD • Loss given default LGD:EAD * (1 - recovery rate) = LGD • Expected loss EL:LGD * probability of default = EL

  12. Gross exposure • Description of counterparty: • Unique ID • Private: Age, gender, martial status etc. • Firms: Balance sheet ratios, turnover, profitability , market environment etc. • Assets outstanding per counterparty • Goss exposure := Sum of all assets

  13. From Gross Exposureto Exposure at Default Exposure and valuation!

  14. Three steps to expected loss • Exposure at default EAD: Gross exposure – credit enhancements = EAD • Loss given default LGD:EAD * (1 - recovery rate) = LGD • Expected loss EL:LGD * probability of default = EL

  15. Recovery rates • Net recovery • Recovery rates • Recovery patterns • Gross recovery • Mingles collateral and recovery • To be avoided if possible • Ariadne supports only net recovery

  16. Recovery rates • Based on historical experience • Single percentage number

  17. Recovery pattern Recovery patterns

  18. Three steps to expected loss • Exposure at default EAD: Gross exposure – credit enhancements = EAD • Loss given default LGD:EAD * (1 - recovery rate) = LGD • Expected loss EL:LGD * probability of default = EL

  19. From Gross Exposureto Exposure at Default PD Exposure and valuation!

  20. Table of Content Introduction Data Credit Exposure Credit Value Adjusted Provisioning (IFRS 9) Stress Scenarios and CVaR

  21. Relational Structure CID LEI MOC CTi MOC CID LEI CID MOC Contract Data Probability of Default Data Migration Matrix Book Keeping Data Valuation Model Parameters Counterparty Data Market Data CR-Spreads RT PDi CPi RT RT Prov

  22. Link to CP and VMP PDi CPi RT RT RT CIDLEI MOC CTi MOC CID CID LEI MOC Contract Data Probability of Default Data Migration Matrix Book Keeping Data Valuation Model Parameters Counterparty Data Market Data CR-Spreads Prov

  23. Risk Free discounting RT PDi CPi RT RT CIDLEI MOC CTi MOCCID CID LEI MOC Contract Data Probability of Default Data Migration Matrix Book Keeping Data Valuation Model Parameters Counterparty Data Market Data CR-Spreads Prov Primary

  24. Adding Credit Riskand Idiosyncratic Spreads PDi CPi RT RT RT CIDLEI MOC CTi MOC CID CID LEI MOC Contract Data Probability of Default Data Migration Matrix Book Keeping Data Valuation Model Parameters Counterparty Data Market Data CR-Spreads Prov 0 Primary Discounting: Mkt_YC(VMP, MD)+CR_SC(CP, MD)+CTi(VMP)+CPi(CP)

  25. Table of Content Introduction Data Credit Exposure Credit Value Adjusted Provisioning (IFRS 9) Stress Scenarios and CVaR

  26. Relational StructureProvisioning PDi CPi RT RT RT CID LEI MOC CTi MOC CID CID LEI MOC Contract Data Probability of Default Data Migration Matrix Book Keeping Data Valuation Model Parameters Counterparty Data Market Data CR-Spreads Prov Provisioning: PD(CP, RT)+PDi(CP)

  27. Table of Content Introduction Data Credit Exposure Credit Value Adjusted Provisioning (IFRS 9) Stress Scenarios and CVaR

  28. Stress Scenarios • Recovery Stress • Initial Position in Risk Factor, CP-table • Stress in Credit Scenario • Rating Stress • Initial Position in Risk Factor, CP-table • Stress in Credit Scenario

  29. Credit VaR • Part of Market Scenario • Original Position in RiskFactor, Market Table • VaR • Market Risk • CreditRisk • CombinedRisk

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