Name: 26.對手方信用風險介紹 (26. Introduction to Counterparty Credit Risk)
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基礎被動語態

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PROFESSOR: Our last class Yi is running from his home

It's a good way to run the classes going forward.

So Yi will present CV modeling for about an hour.

And then Jake, Peter and myself, we will do concluding remarks.

We will be happy to answer any questions on the projects

Sorry I couldn't make it in person because of the snow.

to discuss with you guys counterparty credit

risks as a part of our enterprise-level derivatives

I run a Cross Asset Modeling Group at Morgan Stanley.

OK, counterparty credit risk exists mainly

Sometimes you owe your counterparty money.

Sometimes your counterparty owes you money.

If your counterparty owes you money, on the payment date,

The default event includes bankruptcy, failure to pay

However, the question is before the counterparty defaults,

Imagine you have a case where your counterparty will pay you

Well, the question is yes, as many of you probably know,

it's the mark-to-market risk due to the likelihood

It is like the counterparty spike widens,

even though you do not need a payment from you counterparty.

to someone, then someone may actually worry about that.

become lower if the counterparty is spread wider.

This is similar to a corporate bond in terms of economics.

You own a bond on the coupon payments date,

or on the principal date, the counterparty can default.

Of course, they can default in between also.

So here comes the important concept credit valuation

Whenever there's a risk, we could put a price on that risk.

essentially is the price of a counterparty credit risk.

It is an adjustment to the price of mark-to-market

from a counterparty-default-free model, the broker quote.

The broker doesn't know the counterparty risk.

A lot of our trade models do not know the counterparty risk

either, mainly because of we're holding it back,

In contrast, in terms of a bond, typically there's

no need for CVA because it is priced in the market already.

And CVA not only has important mark-to-market implications,

it is also a part of our Basel III capital.

Not only change your valuation, but could impact your return

Because of a CVA risk, the capital requirements

So you may have a bigger denominator in this return RE,

CVA risk, as you may know, has been a very important risk,

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26.對手方信用風險介紹 (26. Introduction to Counterparty Credit Risk)

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