credit-risk


black scholes - Merton model riskless self-financing derivation

We construct a locally risk-free self-financing portfolio $Xt$, at time $t$, with $\Deltat^1$ share of debt and $\Deltat^2$ share of equity. That is, \begin{align*} Xt = \Deltat^1 Dt + \Deltat^2 Et.... Read More


credit risk - Aggregation of $\rho$ and $p$ for a vasicek model

You can first compute the average PD - few choices would be: Simple average of the individual PDs Exposure weighted average of the PDs If the PDs range is too large, then you might want to bucket th... Read More


risk - Can Economic Capital cover Regulatory Capital?

Economic Capital (EC) covers potential losses under normal conditions, whereas Regulatory Capital (RC) covers potential losses under stressed conditions. Thus, is not uncommon for the RC to be grater... Read More


risk - Credit VaR Formula

Here is the excel formula with steps: =NORMSDIST((NORMSINV(0.02)+NORMSINV(0.999)×SQRT(0.1))/SQRT(1−0.1)) =NORMSDIST((−2.054+3.09×SQRT(0.1))/SQRT(1−0.1)) =NORMSDIST(-1.135) =12.8% They keep changing t... Read More


fixed income - Cost of Carry Bear Flattener

In this context, I believe carry refers to the sum of "pure" carry + roll down. Carry, in the most general sense, is the return of a position in a static world; i.e., assuming time is the only variab... Read More


risk management - Extracting Default probability from a single CDS

Yes, you can assume that, since you cannot extract the probability of default for shorter maturity, but for the 5-years only CDS one, because of unavailability of data. Of course, you'll have to upda... Read More


credit risk - How to calculate the CVA of a forward contract?

Actually the problem is that the probability of default the second year is conditioned by the default the first year. So you have to multiply 4%101.2199%, because 1% of the times it has already defau... Read More


CVA/CDVA - Worsened Credit Quality implies profit?

As I see it, the term $\Pi_B(t, T)$ is the value of the derivatives already owned by the bank. So, it's not some price they need to pay but an asset on the balance sheet. This increase in asset value... Read More


cds - Calibration Merton Jump-Diffusion

Hi am having to write as an 'answer' as am new to forum. We used stochastic intensity models on desk from a while back. Generally Black-Karasinski to avoid negative hazard rates (and for useful feat... Read More


Credit risk data

CDX is available from Bloomberg at no extra cost, though they do not (so far as I know) form a total-return series that takes rolls into account. See, for example, CDX HY CDSI S19 5Y PRC Corp or Bloo... Read More