credit risk 1 note

credit risk 1 note - FNEN6850 Credit Risk 1 Three...

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FNEN6850 Credit Risk 1. Three components to loss = exposure, default, recovery Exposure – assumed to be nonstochastic amt – positive or negative Crdit exp – max of exposure or zero Pd = probability of default Recovery rate – or loss given rate Traditionally exposure was considered fixed amt – now its considered stochastic 2. Single counterpart view – aggregate all your exposures – to understand your overall exposure to a company Ex. dealing with a us, ger/france (with a netting agreement between ger and fr but not wid us) If netting then the credit exposure = max(0, sum of exposures) If no meeting, then counterparty exposure = sum of max (0, exposure) Ex. Us = -5, Ger = 20, Fr = -10 (all exposure values) then total exposure is 10 (since ger/fr = 10, Us = -5) … therefore total 10 3. Enterprise credit risk management Basel II = allowed internal models to be used for credit risk – intention –constrained model – allowed them to us their internal credit ratings – basel 1 was a lookup table wid no assessment of credit ratings Valuation – value ur products Exposure – understanding impact of netting Risk and capital – brings in the credit model – ultimately coming with a pf credit risk measuer Allocation – 4. Motivation
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credit risk 1 note - FNEN6850 Credit Risk 1 Three...

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