This paper describes the use of counterparty loss distributions for credit risk management and capital allocation in derivative portfolios. We describe the data requirements, theory and simulation procedure for estimating such a distribution and highlight the important effects using simple...

This article shows how a modeling framework for the evolution of credit spreads can be built up starting from a simple representation with only two states - default and no default. The model is generalized by introducing credit classes, with transitions from one class to another driven by a...