Intra-Bank Counterparty Credit Risk Modeling Under Basel II: What is New?

12 Pages Posted: 18 Dec 2009

See all articles by Wael H. Fayyad

Wael H. Fayyad

McMaster University - Department of Mathematics and Statistics

Date Written: December 17, 2007

Abstract

This paper first describes the treatment of counterparty credit risk of OTC derivatives under Basel II. It present Standard Method SM and Current Exposure Method CEM of calculating EAD. It also offer evaluation of those methods and their shortfalls. Second, a model of counterparty credit risk with correlation between default probabilities and interest rate was presented. The relevancy of such measure is particularly appropriate given the recent defaults in some of the major banks. Furthermore, the credit hyprid product with an interest rate underlying assumes the inclusion of credit default probability to value the optional part in counterparty risk. Those products are extensively used by banks now and proper valuation should take counterparty credit risk into account.

Keywords: Counterparty credit risk

JEL Classification: E58

Suggested Citation

Fayyad, Wael H., Intra-Bank Counterparty Credit Risk Modeling Under Basel II: What is New? (December 17, 2007). Available at SSRN: https://ssrn.com/abstract=1525192 or http://dx.doi.org/10.2139/ssrn.1525192

Wael H. Fayyad (Contact Author)

McMaster University - Department of Mathematics and Statistics ( email )

Canada
9055259140 (Phone)

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