Counterparty Credit Risk and Credit Value Adjustment: A Continuing Challenge for Global Financial Markets, 2nd Edition

3.4 Summary

In this chapter, we have defined counterparty risk, introducing the key components of credit exposure, default probability and recovery, and outlining the risk mitigation approaches of netting and collateralisation. We have discussed various ways of quantifying and managing counterparty risk from the traditional approach of credit limits to the more sophisticated approaches of pricing via CVA and the consideration of portfolio and hedging aspects.

The next section of this book, Chapters 4–7, will deal in depth with the mitigation of counterparty risk.

Notes

1. On the basis that an individual unable to pay their credit card bill is likely to be close to their limit.

2. This is not precisely true in the case of bilateral counterparty risk (DVA), discussed in Chapter 13, although we will show that conventions regarding closeout amounts can correct for this.

3. The largest multi-currency cash settlement system, see http://www.cls-group.com.

4. Delivery versus payment where payment is made at the moment of delivery, aiming to minimise settlement risk in securities transactions.

5. This is a bank account held in a foreign country, denominated in the currency of that country. Nostro accounts are used for settlement of foreign exchange transactions.

6. This is the process of determining the price of an asset in a marketplace through the interactions of buyers and sellers.

7. Indeed, in a survey of banks I carried out in 2009, “Credit value adjustment and the changing environment ...