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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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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
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
Table of Content Introduction Data Credit Exposure Credit Value Adjusted Provisioning (IFRS 9) Stress Scenarios and CVaR
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
Guarantee Obligor CNTRL: OBL Guarantor Borrower Contract(s)
Collateral(CloseOutNetting) Obligor CNTRL: CLO Collateral Borrower Contract(s) Contract(s)
Table of Content Introduction Data Credit Exposure Credit Value Adjusted Provisioning (IFRS 9) Stress Scenarios and CVaR
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
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
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
From Gross Exposureto Exposure at Default Exposure and valuation!
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
Recovery rates • Net recovery • Recovery rates • Recovery patterns • Gross recovery • Mingles collateral and recovery • To be avoided if possible • Ariadne supports only net recovery
Recovery rates • Based on historical experience • Single percentage number
Recovery pattern Recovery patterns
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
From Gross Exposureto Exposure at Default PD Exposure and valuation!
Table of Content Introduction Data Credit Exposure Credit Value Adjusted Provisioning (IFRS 9) Stress Scenarios and CVaR
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
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
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
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)
Table of Content Introduction Data Credit Exposure Credit Value Adjusted Provisioning (IFRS 9) Stress Scenarios and CVaR
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)
Table of Content Introduction Data Credit Exposure Credit Value Adjusted Provisioning (IFRS 9) Stress Scenarios and CVaR
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
Credit VaR • Part of Market Scenario • Original Position in RiskFactor, Market Table • VaR • Market Risk • CreditRisk • CombinedRisk