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...

In this article, we discuss the calibration of wrong way risk (WWR) model by using information from the credit default swap (CDS) market. A Quanto CDS provides credit protection against the default of a reference entity but is denominated in a non-domestic currency. The payoff of a Quanto CDS...

A recent trend in pricing counterparty credit risk for OTC derivatives has involved taking into account the bilateral nature of the risk so that an institution would reduce counterparty risk in line with their own default probability. Done to an extreme, this practice has worrying implications...

Since the global financial crisis, two significant regulatory initiatives have been introduced in the form of the central clearing mandate and bilateral margin requirements. A major implication of these initiatives is the need for major players in the OTC derivative market to post collateral, in...

When considering counterparty credit risk, it has become increasingly common in recent years for institutions to consider bilateral CVA which includes debt value adjustment (DVA) linked to their own default probability. However, the use of DVA is contentious as it is not obvious that an...

Monoline insurers act as triple-A guarantors of the rather senior risks in structured finance. The purchaser of credit insurance or protection from a monoline may argue that they take only a small amount of counterparty risk which is a common side-effect of trading OTC derivatives products....