Finance and Economics Discussion Series: Measuring Counterparty Credit Exposure to a Margined Counterparty (Paperback) (ISBN-13: 9781288711413)

Firms active in OTC derivative markets increasingly use margin agreements to reduce counterparty credit risk. Making several simplifying assumptions, I use both a quasi- analytic approach and a simulation approach to quantify how margining reduces counterparty credit exposure. Margining reduces counterparty credit exposure by over 80 percent, using baseline parameter assumptions. I show how expected positive exposure (EPE) depends on key terms of the margin agreement and the current mark-to-market value of the portfolio of contracts with the counterparty. I also discuss a possible shortcut that could be used by firms that can model EPE without margin but cannot achieve the higher level of sophistication needed to model EPE with margin.

Author: Michael S. Gibson
ISBN-10: 1288711417
ISBN-13: 9781288711413
Publisher: Bibliogov
Language: English
Published: 02/06/2013
Pages: 22
Format: Paperback
Weight: 0.13lbs
Size: 9.69h x 7.44w x 0.05d