Counterparty Risk Management Analysis for Corporate Treasury · Bloomberg LP 10:30am, 24 Apr 2018 ....
Transcript of Counterparty Risk Management Analysis for Corporate Treasury · Bloomberg LP 10:30am, 24 Apr 2018 ....
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Counterparty Risk Management Analysis for Corporate Treasury
Alison Fletcher
Bloomberg LP
10:30am, 24 Apr 2018
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Key Concepts
• CVA – Credit Valuation Adjustment – Difference between risk-free portfolio value and
the credit-adjusted portfolio value. The adjustment takes into account potential default.
• DVA – Debit Valuation Adjustment – Corporates own default risk.
• Bilateral – Difference between the two. Keep in mind the
worse credit is expected to default first.
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Agenda
• Key concepts
• The traditional approach
• Pre-trade considerations
– Single trade DVA calculation against my own name
– Portfolio incremental calculation on my bank trades
• Post-trade considerations
• Questions
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The Traditional Approach
• Corporates/banks traditionally used counterparty ratings as the major input to determine counterparty limits and credit spreads on trades.
• From their relationship banks, best price was the driving factor that Corporates used to determine who they dealt with.
• But this has been changing…
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Credit Ratings
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Electronic Trading Allowed Easy Determination of Additional Cost
• Logistics used to make it challenging to ask prices of banks in competition and importantly quickly work out the cost of trading of one over another.
• Electronic trading changed this. Corporates were able to easily quantify the cost of dealing with one back over another.
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The 5 Year Corporate CDS is a Key Input
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But what if there is no market CDS?
• As an alternative the market has been turning to a model CDS.
• Estimates the default probability.
• Ability to override key inputs with your own data.
• Used for both where the Corporate does not have a CDS but also when the Bank does not have a CDS such as some of the Canadian Banks.
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Default Risk Model as market CDS Alternative
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Pre-trade Considerations
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Calculate Potential Credit Spread on a Single Trade
• Price up your IRS or long-dated FX trade.
• Load in your CDS curve or model CDS.
• Run DVA on this to see the credit-adjusted price.
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Price up your IRS
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Calculate the DVA Adjustment
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Price Your FX Trade
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Calculate your DVA Adjustment
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Corporate Counterparty (Bank)
Limits and Risk
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Electronically to keep track of Limits
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Which bank reduces my exposure?
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Post-trade Considerations
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Reporting CVA Adjusted Valuations
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Collateral as an Alternative?
• European regulation driving some corporates in this direction.
• Not as common in the US.
• Cash-rich corporates.
• Used as an alternative to paying credit spread upon trading.
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Collateral Management Margin Calculation
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And then Manage Disputes