RiskMetrics Counterparty Credit Exposure Module
Credit exposure represents the cost of replacing a transaction or a set of transactions with a counterparty if that counterparty defaults (today or at some time in the future) under the assumption of no recovery of claims.
Credit exposure is usually applied or used as an input in the following ways:
- Risk concentration management
- Credit limit management for trade approvals
- Regulatory and Economical Capital (calculating Exposure at Default)
- Pricing, risk premium and hedging cost (Credit Valuation Adjustment)
The estimation of credit exposure to derivatives counterparties involves a broad range of issues. RiskMetrics Counterparty Credit Exposure Module employs a Monte-Carlo simulation-based engine to generate future market scenarios. Utilizing these market scenarios, the generation of exposure distribution and estimation of statistics across user-defined horizon buckets for a wide range of assets is possible. Clients can account for risk mitigation mechanisms by the specific modeling of netting and margining arrangements. Consolidation of exposure can then be aggregated at any level of the portfolio for limit and exposure management.