Measuring counterparty credit exposure to a margined counterparty

Michael S. Gibson
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Michael S. Gibson: https://www.federalreserve.gov/econres/michael-s-gibson.htm

No 2005-50, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Firms active in OTC derivative markets increasingly use margin agreements to reduce counterparty credit risk. Making several simplifying assumptions, I use both a quasi- analytic approach and a simulation approach to quantify how margining reduces counterparty credit exposure. Margining reduces counterparty credit exposure by over 80 percent, using baseline parameter assumptions. I show how expected positive exposure (EPE) depends on key terms of the margin agreement and the current mark-to-market value of the portfolio of contracts with the counterparty. I also discuss a possible shortcut that could be used by firms that can model EPE without margin but cannot achieve the higher level of sophistication needed to model EPE with margin.

Keywords: Risk management; Derivative securities; Over-the-counter markets (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-fmk
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Citations: View citations in EconPapers (2)

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