Credit Exposure

[Biju]

Hi David,

Can you please clarify the below on credit exposure profiles

1)Credit Exposure Profiles
We mean term structure of Credit Exposure. ie.+ve MTM values at various points in future
The Variation in Credit Exposure values at different tenors in future is because of the different Risk Factor Sensitivities like (IR,FX,Price change in Equity and commodities) .Please confirm my understanding ..
Does also include Counterparty parameters PD,LGD...or this will affect only Expected Loss and not Credit
Exposure ?

2) When we say Credit Exposure values at different tenors are Future +ve MTM .
When a Bank aggregate these Credit Exposures does the figures get discounted to Present Value ?
I am trying to understand the Exposure profile of Forwards which are mentioned as F(t) ..So if we
discount this profile will be flat?

Thanks in Advance
Biju

 

[ShaktiRathore]

1) Credit exposure to party A is the positive MTM that is the value of a derivative contract to the party A-value of contract to the counter party and as the value of the derivative changes with the movement of the interest rates or Forex rates to both the counter-parties MTM changes, if it changes such that the value of the contract to A increases then there is net positive increase in MTM to A and thus the credit exposure to A increases. The PD and LGD does not affect credit exposure(affected by market variables movements) but these does affect the credit losses that can happen to the A. MTM = present value of the contract to A - present value of the contract to counter party thus the figures do get discounted to present value.

thanks

 

[Biju]

Thanks Shakti.
So when we say for Forward Rate Agreements the EE profile is increasing function of time( sqrt(t)) ..The underlying factors that influence final netted payment excluding the time value of money is a function of time.
Because when we say EE profile ..we are talking on the term structure of PV of EE? Is my understanding correct on this

Thanks in Advance
Biju