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Finance and Economics Discussion Series: Measuring Counterparty Credit Exposure to a Margined Counterparty

by Michael S. Gibson , United States Federal Reserve Board
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Current price ₹1,336.00
Original price ₹1,446.00
Original price ₹1,446.00
Original price ₹1,446.00
(-8%)
₹1,336.00
Current price ₹1,336.00

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Book cover type: Paperback
  • ISBN13: 9781288711413
  • Binding: Paperback
  • Subject: N/A
  • Publisher: Bibliogov
  • Publisher Imprint: Bibliogov
  • Publication Date:
  • Pages: 22
  • Original Price: USD 14.75
  • Language: English
  • Edition: N/A
  • Item Weight: 59 grams
  • BISAC Subject(s): General

Firms active in OTC derivative markets increasingly use margin agreements to reduce counterparty credit risk. Making several simplifying assumptions, I use both a quasi- analytic approach and a simulation approach to quantify how margining reduces counterparty credit exposure. Margining reduces counterparty credit exposure by over 80 percent, using baseline parameter assumptions. I show how expected positive exposure (EPE) depends on key terms of the margin agreement and the current mark-to-market value of the portfolio of contracts with the counterparty. I also discuss a possible shortcut that could be used by firms that can model EPE without margin but cannot achieve the higher level of sophistication needed to model EPE with margin.

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