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Practical Applications from the Experts - July 2010
categories: Product Documentation, general
Risk Management of Counterparty Credit Exposure
MSCI now has risk analytics that can help a risk manager measure and manage the exposure her firm has with trading counterparties. Briefly, we have the following analytics and risk measures:
Analytics
Measuring exposure: We use a Monte Carlo framework and full re-pricing in order to construct distributions of transactions, netting set values and exposures. The risk factors follow mean reverting (for interest rates, Spreads and volatilities) Brownian motions. The pricing covers over 80 asset classes and transactions are properly aged.
Mitigate exposure: We capture the built-in mechanisms such as netting and collateral. We model typical margin call workflows and calculate corresponding close out risk. Collateral is assumed to be cash.
Manage exposure: Limits may be defined at any level (counterparty, country, asset class,..). We price the value of protection on any involved party (bilateral CVA). We compute default probabilities from various data sources including the CDS spreads, interest rates, equity (Merton model), and handle user specified PDs/ hazard rates.
Statistics
The credit exposure specific statistics are based on the measure max(V-C,0) where V is the value of netting set and C is posted the collateral. The statistics and features available to the user include (see tables 1, 2 and 3 for further details):
- Exposures: Current and Potential Future exposures + profile summary (peak, averages, etc)
- Collateral Balance: credit support amounts consistent with collateral agreements. Current and potential futures collateral balance amounts.
- Credit Valuation Adjustments (pricing the counterparty credit risk)
- Stress tests are available for every statistic for the following risk factors:
- Market factors like spreads, interest rates, equities,…
- Credit factors such as default probabilities,…
- Agreement terms such as netting options (all netted, no netting or follow agreements)
Reporting
The credit exposure is currently available through managed services (reporting and web services). Check out some sample reports. (PDF)
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