By Risk Books, Robert Jameson
* This new version has been up-to-date and prolonged to supply you with the newest ideas and advancements within the by-product credits threat industry * Six new particularly commissioned chapters on key components equivalent to the credits hazard of credits derivatives, difficulties of asset allocation, modelling and simulation and credits default swaps * Updates of the most recent instruments and methods used to degree and deal with spinoff credits chance
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Extra info for Derviative Credit Risk
The market value must drop to zero at maturity (sometimes called the "pull to par" effect), as illustrated in Figure 23, since there are no more cashflows to be exchanged. The market value of the interest rate swap and how it evolves over time has clear implications for contingent credit exposure. As pointed out earlier, the evolution of the credit exposure of an interest rate swap is contingent because it is dependent on the value of the swap. If the value of an interest rate swap is negative, then one has no credit risk.
The net loss is 3,400 (= 25,900 - 22,500). The net loss is the loss arising from gamma risk. The futures exchange (say entity B) marks A's position daily in order to determine the necessary variation margin requirements. Conceptually, from a credit risk perspective, the exchange behaves as if it had purchased the 100 call option contracts and sold 74 futures. Accordingly, entity B would have gained 25,900 54 55 on its short futures contracts and lost 22,500 on its long options contracts. Its net position would be valued at 3,400 and therefore entity B has a credit risk exposure of 3,400 to entity A.
As illustrated in Figure 11, one can determine a range of future market values around an average within a specified level of statistical confidence. In other words, one can determine (assuming a current market value of say 100 million) a "best case" market value (say 102 million) and "worst case" market value (say 98 million) as a function of time with a specified level of confidence (say two standard deviations). Observe in this illustrative example that the probability of achieving a difference larger than a pre-specified basic amount (eg 2 million in absolute value terms) from the current market value is the same in the "best case" and the "worst case".