pricing counterparty credit risk for otc derivative transactions

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1、PricingCounterpartyCreditRiskattheTradeLevelMichaelPykhtinCreditAnalytics&MethodologyBankofAmericaRiskQuantCongressNewYork;July8-9,2008DisclaimerThisdocumentisNOTaresearchreportunderU.S.lawandisNOTaproductofafixedincomeresearchdepartment.Opinionsexpressedheredonotnecessarilyrepre

2、sentopinionsorpracticesofBankofAmericaN.A.Theanalysesandmaterialscontainedhereinarebeingprovidedtoyouwithoutregardtoyourparticularcircumstances,andanydecisiontopurchaseorsellasecurityismadebyyouindependentlywithoutrelianceonus.Thismaterialisprovidedforinformationpurposesonlyandisn

3、otanofferorasolicitationforthepurchaseorsaleofanyfinancialinstrument.Althoughthisinformationhasbeenobtainedfromandisbasedonsourcesbelievedtobereliable,wedonotguaranteeitsaccuracy.NeitherBankofAmericaN.A.,BancOfAmericaSecuritiesLLCnoranyofficeroremployeeofBankofAmericaCorporationaf

4、filiatethereofacceptsanyliabilitywhatsoeverforanydirect,indirectorconsequentialdamagesorlossesarisingfromanyuseofthisreportoritscontents.IntroductionCounterpartycreditriskistheriskthatacounterpartyinanOTCderivativetransactionwilldefaultpriortotheexpirationofthecontractandwillbeuna

5、bletomakeallcontractualpayments.Exchange-tradedderivativesbearnocounterpartyrisk.Theprimaryfeaturethatdistinguishescounterpartyriskfromlendingriskistheuncertaintyoftheexposureatanyfuturedate.Loan:exposureatanyfuturedateistheoutstandingbalance,whichiscertain(nottakingintoaccountpr

6、epayments).Derivative:exposureatanyfuturedateisthereplacementcost,whichisdeterminedbythemarketvalueatthatdateandis,therefore,uncertain.Forthederivativeswhosevaluecanbebothpositiveandnegative(e.g.,swaps,forwards),counterpartyriskisbilateral.SeeCanabarro&Duffie(2003),DePrisco&Rosen(

7、2005)orPykhtin&Zhu(2007).ExposureatContractLevelMarketvalueofcontractiwithacounterpartyisknownonlyforcurrentdate.Foranyfuturedatet,thisvalueisuncertainandshouldbeassumedrandom.Ifthecounterpartydefaultsattimepriortothecontractmaturity,maximumeconomiclossequalsthereplacementcostofth

8、econtractIfthecontractvalueisposi