Measuring and managing the credit exposure of derivatives portfolios

  • CONCLUSION The analysis of the exposure measurement problem has shown that the proper measurement of counterparty exposure for portfolios of derivatives transactions is a complex task that cannot be performed without making a lot of simplifying assumptions. Because of the complicated interaction of correlation effects and offsettings from different transactions, the single transaction framework which is currently used by most banks is definitely not capable of accurately determining the portfolio credit risk. When simulation techniques are applied to estimate exposure, the accuracy of exposure estimations can be increased significantly. However, a lot of modelling choices has to be made concerning the valuation of transactions and the stochastic model of underlying market rates. Because the system has to make projections of market rates into the far future, the choice of an appropriate stochastic model for market rate dynamics is crucial in order to prevent unreasonable scenarios. The predominant application of models based on Brownian Motion in today’s bank risk management therefore leads to questionable results in respect to derivatives exposure evaluation.

Download full text files

Export metadata

Additional Services

Share in Twitter Search Google Scholar
Author:Mark WahrenburgORCiDGND
Document Type:Preprint
Date of Publication (online):2009/09/15
Year of first Publication:1997
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2009/09/15
Page Number:24
Source:CAREFIN-Centre for Applied Research in Finance ;
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht