Counterparty Risk, Credit Exposure and CVA

 

About the teacher's Counterparty Credit Risk new book:

“Congratulations to Jon Gregory. This is a very readable book about an area that has become increasingly important to all financial institutions.”

Professor John Hull - University of Toronto, Canada
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Course Outline

This course explains and describes counterparty risk and the quantification and management of CVA. The ideas are built up sequentially and workshops are used to develop the key ideas including simulation of exposure, the impact of risk mitigants and calculating CVA. Attention is also given to the impact of recent regulatory changes under Basel III on the management of counterparty risk and CVA - in particular CVA VAR and Central Counterparties. Participants will be able to take away all worked examples and additional exercises and models implemented using Excel functions and macros.

All delegates receive a copy of Jon's book, "Counterparty Credit Risk: The new challenge for global financial markets".

Who The Course is For

  • Credit traders
  • Derivatives traders and marketers
  • Risk managers and credit risk practitioners
  • Structurers
  • IT
  • Middle office
  • Senior management
  • Quantitative researchers
  • Product control
  • Portfolio managers
  • Operations / Collateral management

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Prior Knowledge

  • Numerate background (basic)
  • Knowledge of derivatives products
  • Basic knowledge of Microsoft Excel


This program is eligible for 24 Continuing Education credit hours from the CFA Institute. If you are a CFA Institute member, CE credit for your participation in this program will be automatically recorded in your CE Diary.


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Day One

Credit exposure

Introduction

  • A history of counterparty risk
  • The OTC derivatives market
  • Credit value adjustment
  • Mitigating counterparty risk
  • Regulation

Credit exposure

  • Credit limits
  • Defining credit exposure
  • Expected exposure (EE), potential future exposure (PFE) and expected positive exposure (EPE)
  • Typical exposure profiles
  • The impact of netting and collateral on exposure

Example: examples of EE, PFE, EPE and the impact of netting and collaterale

Methodology for simulating exposure

  • Simple approaches
  • Overview of methodology / Example
  • Aggregation and the impact of netting
  • Incremental exposure
  • Marginal exposure

Example: quantifying the impact of netting on credit exposure

Quantifying credit exposure in the presence of risk mitigants

  • Impact of terminations / resets
  • Analysis of haircuts
  • Call and return calculations
  • The close-out period
  • Post processing
  • Impact of collateral on exposure - examples
  • Impact of correlation with non-cash collaterar

Example: implementing collateral calculation to calculate call and return amounts and simulating the impact of collateral on exposure

Day Two

Quantifying credit exposure and portfolio considerations

Default and credit spreads

  • Defining default probability
  • Historical data / Credit spreads
  • Market-implied default probabilities
  • Examples of credit curves
  • Mapping methods
  • Recovery rates

Example: calculating default probability from CDS quotes / analysis of mapping methods

Portfolio Counterparty Risk and Basel III

  • Impact of counterparty risk at the portfolio level
  • The alpha factor
  • Basel II definitions and EEPE
  • Basel III and CVA VAR

Central Counterparties

  • The need for central clearing
  • Multilateral netting
  • The mechanics of trading through a CCP / Advantages and disadvantages
  • Too big to fail?

Workshop: computing the alpha factor for various different credit portfolios

Day Three

Credit Value Adjustment (CVA)

Complexities of CVA

  • CVA for collateralized positions
  • Bilateral CVA (DVA)
  • Should you use DVA?
  • Funding

Example: computing CVA in the presence of netting and collateral and computing DVA

Funding and valuation

  • Funding cost and OTC derivatives
  • OIS discounting
  • The role of FVA or LVA
  • Funding and DVA
  • Optimisation of CVA, DVA, funding and regulatory capital

Example: example calculation of FVA (LVA)

Wrong-way risk

  • Evidence and examples of wrong-way risk
  • Examples for FX, commodities and options
  • Credit derivatives
  • Monoline insurers
  • Counterparty risk and the failure of CDOs

Example: simple wrong-way risk model and simple CDS counterparty risk calculation

Managing CVA volatility

  • How to manage CVA
  • Static hedging
  • Dynamic hedging and CVA Greeks
  • Hedging and DVA
  • Hedging in practice
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