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

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9.5 Netting Examples

9.5.1 Examples

We now consider the netting benefit achieved in several examples.8 The trades considered are as follows:

  • Base case. Payer interest rate swap, GBP, 5-year maturity, “Payer IRS GBP 5Y”.
  • Trade 1. Payer interest rate swap, GBP, 6-year maturity, “Payer IRS GBP 6Y”.
  • Trade 2. Payer interest rate swap, EUR, 5-year maturity, “Payer IRS EUR 5Y”.
  • Trade 3. Receiver interest rate swap, EUR, 5-year maturity, “Receiver IRS EUR 5Y”.
  • Trade 4. Cross-currency swap paying GBP, receiving USD, “CCS GBPUSD 5Y”.

All trades have a notional of 100m in the relevant currency except the CCS, which has a smaller notional of 25m.9 Unless otherwise stated, the exposures have been simulated at time intervals of 10 calendar days with a total of 10,000 simulations. We show the trade-level EE and PFE profiles (both positive and negative) in Figure 9.7.

Figure 9.7 EE and PFE profiles for the trades used in the examples. The exposure from the counterparty's point of view is represented by the NEE and 5% PFE. Note that the receiver swap (not shown) is simply the reverse of the equivalent payer. All currencies in base units.

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The reader may notice that the interest rate swaps have ...

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