Collateral and Counterparty Risk Management

Training Provided by London Financial Studies Course Outline This course explains and develops the ideas and models for collateral management and the measurement and quantification of counterparty risk. The ideas are built up sequentially and workshops are used to develop the key ideas including margin calculations, estimation of haircuts, credit exposure and pricing counterparty risk. Participants will be able to take away all worked examples and additional exercises and models implemented using Excel functions and macros. Who The Course is For * Credit traders and credit officers * Risk managers and credit risk practitioners * Structurers and salespeople * IT * Middle office * Senior management * Quantitative researchers * Product control * Portfolio managers * Operations / Collateral management Prior Knowledge * Numerate background (basic) * Knowledge of derivatives products * Basic knowledge of Microsoft Excel

Collateral and Counterparty Risk Management Day One
Basics of collateralisation

Credit exposure and collateral

* Defining credit exposure
* Expected positive exposure and worst case exposure
* Typical credit exposure profiles for different products
* Exposure netting
* Impact of collateral
* Benefits of effective collateral management

Workshop: Computing credit exposure and showing the impact of collateralisation

Basics of collateral management

* Types of eligible collateral
* Haircuts, thresholds and minimum transfer amounts
* Portfolio reconciliation
* Cross-product collateralisation
* Basel 2 treatment

Workshop: Implementing a general method for calculating posting and return amounts including current collateral, thresholds, independent amounts, minimum transfer amount, haircuts and rounding
Day Two
Advanced issues in collateralisation

Risks of collateralisation

* Organisational considerations
* Legal requirements
* Outsourcing
* Operational and settlement risk
* Dispute resolution

Workshop: Calculating appropriate haircuts with a value-at-risk approach as a function of security type and maturity

Impact of correlation and volatility on collateralisation

* Incorporating collateral in an exposure management framework
* Volatility, value-at-risk and haircuts
* Correlation and wrong-way collateralisation
* The effective margin call frequency
* Liquidation impact on price

Workshop: Are the independent amounts and haircuts large enough? Simulating the impact of volatility, correlation and forced liquidation. Calculating the optimal liquidation period
Day Three
Counterparty risk and collateral

Pricing counterparty risk

* Default probability
* Expected positive exposure
* Recovery rates
* Credit value adjustment (CVA)
* Pricing formula for CVA

Workshop: Implementing a credit value adjustment and applying it to a range of products

Pricing and hedging counterparty risk in the presence of collateral

* Impact of netting on CVA
* Impact of collateral on CVA
* Hedging and contingent credit default swaps (CCDS)
* Wrong-way counterparty risk and collateral
* Bilateral counterparty risk and collateral

Workshop: Impact on collateral on exposure and assessment of collateral benefit in the case of wrong-way and bilateral counterparty risk

Counterparty risk in credit derivatives

* Counterparty risk in credit default swaps
* Counterparty risk, structured credit and the credit crunch
* Monolines and credit derivative product companies
* The role of a central clearing house

Workshop: Assessing the counterparty risk in a credit derivative transaction

About The Training Provider: London Financial Studies

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