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

8.7 Summary

In this chapter we have discussed credit exposure. Some key definitions of potential future exposure, expected exposure and expected positive exposure have been given. The factors impacting future exposures have been explained and we have discussed the impact of netting and collateral. The next chapter will be concerned with the actual quantification of exposure, including all components discussed here such as netting and collateral.

Notes

1. The definitions of value will be more clearly discussed below.

2. This is a symmetry effect where one party's gain must be another's loss. There may be reasonable concern with defining a gain in the event of an institution's own default. This will be discussed in more detail in Chapter 13.

3. Historically there have been two methods to govern the calculation of closeout amounts. The first is a “Market Quotation” approach that requires quotes from dealers (a minimum number of quotes may be specified) in the relevant market for replacement transactions that represent the economic equivalent of those being terminated. However, in cases of extreme volatility and even a breakdown of the market (following a major default, for example) it may still be difficult to achieve the quote required to establish such an amount. Another approach is the “Loss” method, where an institution may determine its losses (including costs) because of terminating the relevant transactions and re-establishing the equivalent positions.

4. The short option position ...