Current Exposure Method in CCR's Calculation

[John Le]

dear All!

i have difficulty to use the Current exposure Method for Counterparty risk management regulated by Basel II, that is how can i Calculate CCF (Credit Conversion Factor) for FX FW in the formula below :

Credit Equivalent Amount (CEM)= Replacement cost + Potential Future Exposure

or CEM = MtM (positive value) + Notional * CCF

I see in Basel II document which shows out some given numbers of CCF, but i dont know what is method to figure out CCF for a certain Currency pair (example : EURUSD, AUDUSD ...), how can i calculate that, and what model is used to figure out such number,

Should you explain through an example ! so that it is easier to understand!

Thank you in advance for any help,

John Le, from Viet Nam

 

[ShaktiRathore]

Hi
First of all shall tell you that the method for estimating the potential future exposure is MCS(MonteCarloSimulation) . RUn the MCS for these currency pair by inputing appropriate inputs as interest rates and their volatility then future scenarios emerge and whats the possible exposure of a long USD versus euro say so that ultimately we get the potential exposure that can arise in the future.
Assuming you know the notional then you can calculate the CCF as Potential Future Exposure/Notional.

thanks

 

[John Le]

Tks for your answer, Mr ShaktiRathore

it is difficult for me to run MCS, in stead of using MCS, can I use Historical simulation for PFE as Attached file to figure out CCF?

Tks for your any comment. I am looking forward to hearing from you and other people

 

[ShaktiRathore]

yes you can use historical simulation if you cant run the MCS to figure out CCF. But you can always use IRP to figure out the forward spot rates. Seeing your interest rate data it seems ok and you can project future spot rates using IRp and the given interest rates. Try to predict using some model as many inputs as you can can for various scenarios. In this way you can better project forward and identify future exposure more accurately.

thanks

 

[John Le]

Thank you very much ,Mr ShaktiRathore