Modeling Counterparty Credit Exposure

When To Use

• Calculating potential future exposure (PFE) profiles for OTC derivative portfolios
• Computing credit valuation adjustment (CVA) and debit valuation adjustment (DVA) for pricing or accounting (ASC 820 / IFRS 13)
• Assessing counterparty credit limits and concentration risk across netting sets
• Evaluating the impact of collateral agreements (CSAs) on exposure profiles
• Stress-testing counterparty exposure under adverse market scenarios
• Supporting regulatory capital calculations under SA-CCR or IMM [VERIFY: applicable regulatory framework]

Inputs To Gather

• Trade population: Full list of trades per counterparty, including notional, trade date, maturity, currency, and product type (IRS, CDS, FX forwards, equity options, etc.)
• Netting agreements: ISDA Master Agreement status, netting set definitions, and any close-out netting enforceability opinions [VERIFY: jurisdiction-specific enforceability]
• Collateral terms: CSA parameters — threshold, minimum transfer amount (MTA), independent amount, eligible collateral types, rehypothecation rights, margin period of risk (MPR)
• Market data: Yield curves, volatility surfaces, FX spot rates, credit spreads (CDS or bond-implied), correlation assumptions
• Counterparty credit data: Credit ratings, CDS spreads (or proxy spreads), probability of default (PD) term structures, loss given default (LGD) assumptions
• Own credit data: Entity CDS spreads or proxy for DVA calculation
• Simulation parameters: Number of Monte Carlo paths, time grid granularity, confidence level for PFE (typically 95th or 97.5th percentile), simulation horizon