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Replacement cost is simply that....what would it cost to replace it. What if you had to replace a position not because of a counterparts defaulted but because of a change in local law? Recovery would be irrelevant since there would be no default event.

This is why Bionic Turtle is so valuable! If you don't get a response immediately from David and team on one of your questions, just keep working; you may find the answer on your own. Regarding all of my posts above, please see the excerpt below (that I just read from an assigned reading!) I...

Furthermore, let's say that the event that triggers the CDS is restructuring. This doesn't necessarily imply that Company D's senior bondholders would also claim an event of default on D's debt right?

In other words, I feel like the events that could trigger payment in a CDS are not necessarilly consistent with the notion of default on a corporate debt. Say that Company A issues Senior Unsecured Debt. Now, assume Company A sells protection to Company C on debt issued by Company D. Assume...

Gregory treats Default Risk as separate and distinct from Downgrade risk. This seems appropriate for higher rated bonds. However, if CCC is the lowest rating, i.e., with no rating below CCC except for Default, it seems that the Default Risk should equal the Downgrade Risk - this is not the...

AAaarrrggghhh! Gregory's Chapter 8 is painful!!!

Gregory seems a bit inconsistent with respect to whether maturity effects exposure. Clearly, the longer the term of the agreement, i.e., the more distant the maturity, the greater the future uncertainty. Also, the greater the root(t) term, so it must affect exposure. He states above formula...

Also, collateral rehypothecation can increase exposure - see @Mkaim and my discussion here: https://forum.bionicturtle.com/threads/rehypothecation-risk.9473/#post-41543

Actually, I think you are right @Mkaim - I haven't synthesized the concepts well yet, but I believe that this is precisely the rationale for a CCP.....and the effect of a CCP as well, at a price of increased systemic risk, once again.

Does this avatar make me look fat?

This gets to compression or netting, I suppose.....but still, since the bilateral agreement between A and B has nothing to do with the agreement between B and C, it bothers me that C benefits from A's property, effectively.

I may be mistaken here, but this is truly surprising to me. Based on what I have read of the Part II material, it seems that the following scenario is possible. Party A and Party B enter into a bilateral agreement. Party A posts collateral to Party B and A maintains economic ownership of the...

now that I reread it, I guess my example isn't really related to "funding" liquidity risk. As an example, consider the Lehman bankruptcy. As soon as intermediaries smelled blood in the water with Lehman, they started asking for better collateral or in effect, significantly more sever...

While @ShaktiRathore's reference is exactly correct, I offer a short example. Consider a hedge fund that offered an intermediary a piece of a senior tranche of an ABS CDO as collateral in early 2007; at the time, this paper was deemed "VERY" safe. Then, the credit crisis hit. Assume the hedge...

sounds like some kind of a self-selection bias based on @Mkaim's post.

kind of like the error term in a regression...the more independent variables you have, i.e., the more risk factors, the less you are leaving to the error term, or to the residual term, presumably.

are you familiar with the black - scholes equation? C = S0N(d1) - K(e^(-rt))N(d2)? The K(e(-rt)) is equivalent to a risk free zero (see that it is discoutned at the risk free rate?). In the Merton Model, the K is replaced with the Face Value of the "risky" debt, or the face value of the...

I also feel like I've asked this before but I can't remember!

@David Harper CFA FRM Is failure to deliver on a swap of any kind a formal default event in that it could force a company into bankruptcy? I am thinking of a company that mistakenly entered into a CDS with physical delivery in a reference asset for which one company owns the entire issuance...

@QuantMan2318 - I would love to offer some insight but I am not an expert at ML! I do have limited experience with SAS Enterprise Miner and I know that SAS offers free instructional material. Other than that, I wouldn't be able to opine on other references at the moment. I suspect that strong...