Description

This course presents measures of exposure to counterparty risk on market transactions. You will see the quantitative and regulatory aspects of internal models in order to have a global approach to the problem. This course will allow you to understand stochastic exposure modeling.

Who is this training for ?

For whom ?

Risk engineers and calculation of economic capital. Quantitative finance consultants.

Prerequisites

Training objectives

Define market risks and credit risk

Know the exposure profiles for different types of products

Analyze the cost of counterparty risk in equity

Understand stochastic exposure modeling.

Training program

• Concept of exposure to counterparty risk
  • Market risks and credit risk on market transactions.
  • Context and history.
  • Why modeling counterparty risk exposure is complicated? Definition of counterparty risk.
  • Losses linked to counterparty risk.
  • Main parameters: exposure, probability of default, losses in the event of default.
  • Definition of exposure measurement.
  • Simple exposure model.
  • Exposure profile analysis.
  • Credit Value Adjustments (CVA).
  • Debt Value Adjustment (DVA) and bilateral CVA.
  • Counterparty risk and bank PnL.
  • Practical work Exposure profiles for different types of products: swaps, forwards, options, etc.
• Basel II - Basel III regulations and exposure indicators
  • Capital requirements and counterparty risk.
  • Current exposure method and internal model method.
  • Exposure indicators.
  • Potential exposure (PFE).
  • Expected exposure (EE).
  • Actual expected positive exposure (EEPE).
  • Calculation of the EAD with the EEPE method and the alpha parameter.
  • Calculation of the effective maturity (Effective Maturity).
  • Approval criteria for use of the method of internal models
• Focus on Basel III innovations
  • Stressed EEPE indicator.
  • The capital charge linked to the variability of the CVA (the CVA VaR).
  • Constraints for taking into account of collateral.
  • Back-testing and stress-testing requirements.
  • Practical work Analysis of the cost of counterparty risk in equity.
• Main aspects of modeling
  • System vision of a counterparty risk model.
  • Modeling of risk factors.
  • Valuation of a derivatives portfolio.
  • Calculation units and netting.
  • Modeling of the collateral and the risk margin period.
  • Setting up back-testing.
  • Setting up in place of stress-testing.
  • Unfavorable correlation risk (Wrong Way Risk).
  • Practical work Calibration of a diffusion of risk factors.
  • Counterparty risk exposure scenarios with margin calls.
  • Reading a Master Agreement and a Credit Support Annex (CSA).