Counterparty credit risk (CCR) is the risk that a counterparty in a deal will not be
able to meet their contractual obligations in the future. While CCR is an important
task for any risk desk, it has often been underestimated due to the miss-conception
that some counterparties were deemed to be either too big to fail or too big to
be allowed to default. This was highlighted by the 2008 nancial crisis that saw
respected banks, such as Lehman Brothers, and nancial service providers, such as
AIG, default on their obligations. Since then there has been renewed interest in
CCR, with the focus being on actively pricing and hedging it. In this work CCR
is invistigated including its intersection with other forms of risk. CCR mitigation
techniques are explored, followed by the formal quanti cation of CCR in the form
of credit value adjustments (CVA). The analysis of CCR is then applied to interest
rate derivatives, more speci cally forward rate agreements (FRAs) and interest rate
swaps (IRSs).
The e ect of correlation on unilateral and bilateral CVA between counterparties,
including risk factors such as the interest rate, is investigated. This is invistigated
under two credit risk modelling frameworks, the structural and intensity
based frameworks. It is shown that correlation has a none-negligible e ect on both
unilateral and bilateral CVA for FRAs and IRSs. Correlation structures, namely
the Gaussian and the Student-t copula, are used to induce dependency in order to
understand their e ect on both unilateral and bilateral CVA. It is shown that the
choice of copula does not have signi cant e ect on either unilateral or bilateral CVA.
| Identifer | oai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:wits/oai:wiredspace.wits.ac.za:10539/12402 |
| Date | 06 February 2013 |
| Creators | Ndlangamandla, Phetha Mandlovini |
| Source Sets | South African National ETD Portal |
| Language | English |
| Detected Language | English |
| Type | Thesis |
| Format | application/pdf, application/pdf |
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