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A Credit valuation adjustment (CVA), [a] in financial mathematics, is an "adjustment" to a derivative's price, as charged by a bank to a counterparty to compensate it for taking on the credit risk of that counterparty during the life of the transaction. "CVA" can refer more generally to several related concepts, as delineated aside.
Settlement risk, also known as delivery risk or counterparty risk, is the risk that a counterparty (or intermediary agent) fails to deliver a security or its value in cash as per agreement when the security was traded after the other counterparty or counterparties have already delivered security or cash value as per the trade agreement.
A Credit Support Annex (CSA) is a legal document that regulates credit support for derivative transactions.Effectively, a CSA defines the terms under which collateral is posted or transferred between swap counterparties to mitigate the credit risk arising from in the money derivative positions.
Offsetting counterparty risk is not always possible, e.g. because of temporary liquidity issues or longer-term systemic reasons. [16] Further, counterparty risk increases due to positively correlated risk factors; accounting for this correlation between portfolio risk factors and counterparty default in risk management methodology is not trivial.
A counterparty (sometimes contraparty) is a legal entity, unincorporated entity, or collection of entities to which an exposure of financial risk may exist. The word became widely used in the 1980s, particularly at the time of the Basel I deliberations in 1988. [1] [page needed]
The TED spread is an indicator of perceived credit risk in the general economy, [2] since T-bills are considered risk-free while LIBOR reflects the credit risk of lending to commercial banks. An increase in the TED spread is a sign that lenders believe the risk of default on interbank loans (also known as counterparty risk) is increasing ...
The XVA-desk is then responsible for managing counterparty risk as well as (minimizing) the capital requirements under Basel. [28] The requirements of the XVA-desk differ from those of the Risk Control group and it is not uncommon to see institutions use different systems for risk exposure management on one hand, and XVA pricing and hedging on ...
The purpose is to reduce the cost, settlement risk and operational risk of clearing and settling multiple transactions among multiple parties. [ 3 ] In addition to the above services, central counterparty clearing (CCP) takes on counterparty risk by stepping in between the original buyer and seller of a financial contract, such as a derivative.