Credit Exposure in the Presence of Initial Margin

Andersen, Leif; Pykhtin, Michael; Sokol, Alexander

doi:10.2139/ssrn.2806156

Cited by 19 publications

(9 citation statements)

References 6 publications

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“…Further, we also assume that netting agreements are allowed, on the basis of which, in the event of default of one of the counterparties, aggregation of transactions before settling is permitted. This is indeed the case in practice in presence of multiple trades within the same asset class and with the same counterparty (see Andersen et al, 2017, for example). Thus, netting represents a further risk mitigation mechanism as the values of all trades are added together, and therefore the resulting portfolio value is settled as a single trade 2 (see also Brigo and Masetti, 2006, for example).…”

Section: The Exposure: a General Treatment -Pricing Exotic Spread Optmentioning

confidence: 78%

“…Each term corresponds to (7) for the parameter settings given in Table 1, which also reports the setting for the case of the 'crude' exposure, and the collateralized exposure under unilateral agreement. Finally, we note that this general formulation of the exposure corresponds broadly to the 'classical model' of Andersen et al (2017).…”

Section: The Exposure: a General Treatment -Pricing Exotic Spread Optmentioning

confidence: 90%

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Integrated structural approach to Credit Value Adjustment

Ballotta

Fusai

Marazzina

2019

European Journal of Operational Research

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Section: The Exposure: a General Treatment -Pricing Exotic Spread Optmentioning

confidence: 78%

Section: The Exposure: a General Treatment -Pricing Exotic Spread Optmentioning

confidence: 90%

Integrated structural approach to Credit Value Adjustment

Ballotta

Fusai

Marazzina

2019

European Journal of Operational Research

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“…However, after the introduction of mandatory VM and IM, the high amount of collateralization results in CVA amounts that are virtually negligible compared to the monetary size of the transaction. Works by Andersen et al [4] and Gregory [10] estimate that the introduction of IM will reduce the expected exposure by approximately two orders of magnitude. Our numerical results support this estimate as can be seen in table 1 below.…”

Section: The Frameworkmentioning

confidence: 99%

An Enhanced Initial Margin Methodology to Manage Warehoused Credit Risk

Cipolina-Kun

Ruíz²,

Laris³

2018

SSRN Journal

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The use of CVA to cover credit risk is widely spread, but has its limitations. Namely, dealers face the problem of the illiquidity of instruments used for hedging it, hence forced to warehouse credit risk. As a result, dealers tend to offer a limited OTC derivatives market to highly risky counterparties. Consequently, those highly risky entities rarely have access to hedging services precisely when they need them most.In this paper we propose a method to overcome this limitation. We propose to extend the CVA risk-neutral framework to compute an initial margin (IM) specific to each counterparty, which depends on the credit quality of the entity at stake, transforming the effective credit rating of a given netting set to AAA, regardless of the credit rating of the counterparty.The proposed methodology is fully compliant with the risk-neutral pricing framework, enables improved risk management for dealers and, subsequently, a route for troubled institutions to access the derivative markets.By transforming CVA requirement into IM ones, as proposed in this paper, an institution could rely on the existing mechanisms for posting and calling of IM, hence ensuring the operational viability of this new form of managing warehoused risk. The main difference with the currently standard framework is the creation of a Specific Initial Margin, that depends in the credit rating of the counterparty and the characteristics of the netting set in question. In this paper we propose a methodology for such transformation in a sound manner, and hence this method overcomes some of the limitations of the CVA framework. Using a range of Swaps and Swaptions, we present realistic numerical examples of CVA values under margining, IM values as computed nowadays, as well as the new amounts of The authors would like to thank Andrew S.Dickinson, Martin Dahlgren and Wujiang Lou The opinions expressed here are those of the authors, and do not necessarily represent the view of their employers 1 arXiv:1812.09407v1 [q-fin.RM]

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“…The corresponding capital can then be calculated using Equation (2). Finally, KVA 0 is calculated using Equation (1). We summarize the steps for calculating KVA with SGBM in Algorithm 1 and illustrate it in Figure A1.…”

Section: The Kva Algorithmmentioning

confidence: 99%

“…c is the close-out period of risk (10 days in our examples). Readers are referred to Andersen et al (2016) for relevant details on credit exposure under bilateral margins.…”

Section: Impact Of Variational and Initial Margin On Kvamentioning

confidence: 99%