Analyzing the essence of counterparty credit risk

05/7/2013 | Structured Credit Investor (U.K.)

When the regulatory guidelines for credit value adjustment, or CVA, are added to the fundamental principles of quantifying and managing risk, counterparty credit risk can seem to be an impossible concept to master, Terri Duhon, managing partner at B&B Structured Finance writes. "The concept of counterparty credit risk is to some extent a function of dealers maintaining a hedged derivative trading book," he notes. "For example, the dealer pays fixed e.g. 3% (versus receiving floating) with a client. It hedges by receiving fixed e.g. 3.04% (versus paying floating) from another dealer on the same notional, currency and maturity, assuming all other terms are equal."

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Structured Credit Investor (U.K.)

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