Book: Counterparty Credit Risk
I’ve had this book in my reading stack for sometime. The book is quite appropriate for the current financial climate, and is written in a way that is easy to read, and hard to put down. The only real problem with this book is the weight – painful from a commute perspective. Somebody did suggest getting the e-book version – maybe next time 
I suspect the e-book would make annotation easier for as I read, and hence I guess there is either an App or an opportunity to write an App that could auto generate blog postings similar to this one out of the annotations
Anyway to the book, here are a few items of interest:
- Page 1 does a nice job of setting the scene, and provides a brief intro to the various forms of risk: Market risk, Liquidity risk, Operational risk, Credit risk
- Page 18, Mitigating Counterparty Risk – netting and collateralisation
- Page 24, Potential Future Exposure (PFE)
- Page 26, Cross-product Netting. This section caused me to wonder if there is a hadoop opportunity to crunch the data, and assess the exposure to a counterparty across transactions
- Page 32, Pricing Counterparty Risk – Credit Value Adjustment (CVA).
- Page 34, Capital Requirements and Counterparty Risk – easier at the portfolio level rather than the transaction level.
- Page 35, Expected MtM and Expected Exposure (EE)
- Page 45, Additional Termination Events (ATE)
- Page 50, IDSA Master Agreement
- Page 51, Unwinding positions, and leveraging counterparty risk to offer unfavorable terms
- Page 53, Multilateral Netting
- Page 68, Haircuts – discount applied to the value of collateral
- Page 71, Rehypothecation – Non-cash collateral usage
- Page 80, Monte Carlo Simulation – Factor choice, scenario generation, revaluation, aggregation, post-processing, extraction of statistics
- Page 97, Model Validation – Source code control, implementation, Input Reconciliation, Output Checking, Backtesting
- Page 203, Wrong-way Risk – unfavorable dependence between exposure and counterparty credit quality
- Page 277, Aggregation of Sensitivities – general and counterparty-specific
- Page 310, The Birth of Basel II
- Page 333, Counterparty Risk in Financial Institutions
- Page 337, Technology Aspects – Monte Carlo simulation engines, Pricing functionality, Databases, Exposure calculations, Trade pricing, Reporting
- Page 373, Novation
Finally, what is really nice about this book is that the book’s web site offers a number of downloadable Microsoft Excel files that are called out throughout the book, coupled with numerous presentations.
