A Guide to Modeling Counterparty Credit Risk

GARP Risk Review, July/August 2007

7 Pages Posted: 16 Jan 2008 Last revised: 4 Mar 2008

Steven H. Zhu

Banc of America Merrill Lynch; Morgan Stanley

Michael Pykhtin

Board of Governors of the Federal Reserve System

Abstract

Michael Pykhtin and Steven Zhu offer a blueprint for modelling credit exposure and pricing counter-party risk. They focus on two main issues: modelling credit exposure and pricing counter-party risk. In the part devoted to credit exposure, we will define credit exposure at contract and counter-party levels, introduce netting and margin agreements as risk management tools for reducing counter-party-level exposure and present a framework for modelling credit exposure. In the part devoted to pricing, we will define credit value adjustment (CVA) as the price of counter-party credit risk and discuss approaches to its calculation.

Keywords: Credit Risk, Credit Exposure, Credit Value Adjustment, Netting and Margin Agreement

Suggested Citation

Zhu, Steven H. and Pykhtin, Michael, A Guide to Modeling Counterparty Credit Risk. GARP Risk Review, July/August 2007. Available at SSRN: https://ssrn.com/abstract=1032522

Steven H. Zhu (Contact Author)

Banc of America Merrill Lynch ( email )

Bank of America Plaza
335 Madison Ave, 5th Floor
New York, NY 10017
United States
646-855-1853 (Phone)

HOME PAGE: http://www.riskwhoswho.com/Charter-Members.html

Morgan Stanley ( email )

1585 Broadway
New York, NY 10036
United States

Michael Pykhtin

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.federalreserve.gov/econresdata/michael-v-pykhtin.htm

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