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CRMM-14-quantifying-counterparty-credit-exposure-2-the-impact-of-collateral.html
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<!doctype html>
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<title>Credit Risk Measurement and Management | Chapter 14 | Quantifying Counterparty Credit Exposure, 2 - The Impact of Collateral</title>
<meta name="description" content="Financial Risk Manager Part 2 Study Materials">
<meta name="author" content="MacLane Wilkison">
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<h1>Chapter 14</h1>
<h3>Quantifying Counterparty Credit Exposure, 2 - The Impact of Collateral</h3>
<p>
<small>Created for <a href="http://alchemistsacademy.com">Alchemists Academy</a> by <a href="http://alchemistsacademy.com/about">MacLane Wilkison</a></small>
</p>
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<section>
<h2>Remargin Period</h2>
<p><em>Definition: Time period one should assume in a worst case scenario before taking delivery of collateral after a call</em></p>
<ul>
<li>Valuation/margin call - time taken to compute current exposure and market value of collateral</li>
<li>Receiving collateral - delay due to processing a collateral request</li>
<li>Settlement - collateral may not be received immediately depending on settlement period</li>
<li>Grace period - period of time before a non-delivering party is deemed to be in default</li>
<li>Liquidation/close-out and re-hedge - time taken to liquidate collateral and close out and re-hedge positions</li>
</ul>
</section>
<section>
<h2>Modelling Collateral</h2>
<ul>
<li>Two sources of risk for a collateralized exposure:</li>
<ul>
<li>Imperfect collateralization at a given date due to terms in the collateral agreement which do not permit a call for the full scredit support amount</li>
<li>Risk that exposure increases <em>in-between</em> margin calls making it impossible to collateralize that portion of the exposure</li>
</ul>
<li>Parameters:</li>
<ul>
<li>Remargin period</li>
<li>Threshold</li>
<li>Minimum transfer amount</li>
<li>Initial margin</li>
<li>Rounding</li>
</ul>
</ul>
</section>
<section>
<h2>Collateralization Risks</h2>
<ul>
<li>Operational risk - missed collateral calls, failed deliveries, computer error, human error, fraud</li>
<li>Default risk - default relating to a security posted as collateral</li>
<li>FX risk</li>
<li>Liquidity and liquidation risk</li>
</ul>
</section>
<section>
<h1>THE END</h1>
<h3><a href="http://alchemistsacademy.com">AlchemistsAcademy.com</a></h3>
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