Counterparty Risk Aggregation and Risk Mitigation

Giovanni Cesari (), John Aquilina (), Niels Charpillon (), Zlatko Filipović (), Gordon Lee () and Ion Manda ()
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Giovanni Cesari: UBS AG
John Aquilina: UBS AG
Niels Charpillon: UBS AG
Zlatko Filipović: UBS AG
Gordon Lee: UBS AG
Ion Manda: UBS AG

Chapter Chapter 12 in Modelling, Pricing, and Hedging Counterparty Credit Exposure, 2009, pp 183-199 from Springer

Abstract: Abstract In the previous chapters we have considered credit exposure of single transactions. We examine now how to aggregate these exposures at counterparty level and then how to control and manage the risk from a portfolio perspective. This is where the real challenge starts and where it becomes clear why a robust modelling framework is necessary. To obtain a portfolio view it is necessary in fact to calibrate models and to compute products of different nature in a consistent way. In a classical Monte Carlo framework, where exposure is computed in two distinct steps, i.e. first by generating scenarios and then by pricing (using analytical pricers or suitable approximations), this commonality is achieved by using the same consistent scenarios across products. In our framework where scenario generation and pricing are linked together, the scenario consistency is embedded in the underlying pricing model. The hybrid product we need to value taking into account all stochastic drivers in a consistent way, is the given portfolio of transactions.

Keywords: Risk Measure; Credit Risk; Credit Default Swap; Risk Mitigation; Expect Shortfall (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprfcp:978-3-642-04454-0_12

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DOI: 10.1007/978-3-642-04454-0_12

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