The Credit Risk of Complex Derivatives, 2nd Edition by Erik Banks (auth.)

By Erik Banks (auth.)

This variation of The credits danger of complicated Derivatives is absolutely up to date and stronger. It discusses and analyses the credits dangers of the hot monetary derivatives. The booklet commences with an summary of the regulatory setting and the renewed emphasis on possibility administration. It then offers a finished evaluate of complicated innovations and swaps, with wide examples and illustrations. The textual content concludes with an in depth dialogue of portfolio credits possibility matters and strategies with a purpose to make sure the most popular and actual figuring out of complicated by-product credits risk.

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Extra resources for The Credit Risk of Complex Derivatives, 2nd Edition

Sample text

DPCs, which carry external credit ratings higher than those of their financial institution sponsors, have been created to pennit banks and securities finns to transact derivatives with a broader range of counterparties and to help concentrate derivative transactions in a more creditworthy segment of the market. Many AA-AAA-rated entities active in the derivative markets (often end-users such as sovereigns, supranationals and highly-rated corporates), have very strict charters or policies which only pennit derivatives dealing with other AA-AAA-rated institutions.

Risk equivalent exposure, the end-result of the risk equivalency process, is often referred to as risk-adjusted exposure, credit equivalent risk or loan equivalent risk. In standard form risk equivalent exposure is precisely equal to the sum of potential and actual market risk. Since at inception of a trade AMR is zero, it follows that risk equivalent exposure is simply equal to PMR; over time, it becomes a blend of PMR and AMR. Risk equivalency is necessary primarily because the derivative instruments found in today's financial markets are not funding transactions, such as unsecured loans or advances.

Employing credit options, forwards or swaps to shift the derivative credit exposure from the original counterparty to a third party). By utilizing risk mitigation techniques more actively the industry is, in effect, providing greater security for itself. II It is also providing the opportunity to execute incremental business by reconstituting credit portfolios and releasing credit limits. Creating and Using Highly Rated Derivative Product Companies (DPCs) One of the interesting trends apparent in the derivative markets since late 1991 has been the establishment of derivative product companies (DPCs) by numerous international financial institutions.

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