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Introduction |  |
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Presenters:
Tomasz Bielecki: Professor Applied Mathematics, Illinois Institute of Technology
Giovanni Cesari: Managing Director, UBS Investment Bank
Stephane Crepey: Associate Professor, Department of Mathematics, Evry University
The credit crisis that started in 2007, with the collapse of well-established financial institutions and the bankruptcy of many public corporations, has clearly shown the importance for any company entering in the derivative business of Modelling, Pricing, and Hedging Counterparty Credit Exposure.
Building an accurate representation of firm-wide credit exposure, for both risk and trading activities, is a significant challenge from a technical as well as a practical point of view. This course can be considered as a roadmap to finding solutions to the problem of computing counterparty risk exposure for large books of both vanilla and exotic derivatives usually traded by large Investment Banks.
Particular emphasis is given to theoretical and computational challenges, such as proper mathematical modelling of counterparty risk embedded in credit derivatives.
The course is divided in two days, which can be attended separately:
Day 1: Problems, Concepts and Techniques
Morning: Practical problems and issues of counterparty risk exposure are surveyed.
Afternoon: The core concepts of counterparty risk exposure and the related practical techniques of managing of this risk are introduced and illustrated via prototypical examples.
Day 2: Models
Morning: Mathematical models used to compute, price and hedge counterparty risk are analysed in details. Emphasis is given to a unified modelling framework which encompasses both the default probabilities of the counterparties as well as the underlying portfolio.
Afternoon: A complete modelling framework and architecture to compute counterparty exposure is
presented. Emphasis is given to solve challenges Investment Banks may face and to provide practical solutions to the problem of modelling counterparty exposure of portfolios of both vanilla and exotic trades.
All delegates will receive a complimentary copy of the Springer 2010 publication: Modelling, Pricing, and Hedging Counterparty Credit Exposure by Giovanni Cesari et al.
About the speakers:
Tomasz R. Bielecki is Professor of Applied Mathematics at the Illinois Institute of Technology. He is the Director of the Master of Mathematical Finance program at IIT and an author of numerous research papers and monographs in the areas of stochastic analysis, stochastic control, manufacturing systems, operations research, financial engineering and mathematical finance. Tomasz consulted for various financial and risk management companies.
Giovanni Cesari is Managing Director at UBS. He is the global head of the CVA-quant group, a front office team responsible for building models to compute and hedge counterparty credit exposure for the Investment Bank. Giovanni graduated from the University of Trieste and received his PhD from ETH in Zurich.
Stephane Crepey is Associate Professor, Department of Mathematics, Evry University. He is director of the Master program MSC Financial Engineering of Evry University. His current research interests are Financial Modeling, Credit Risk, Numerical Finance, as well as connected mathematical topics in the fields of Backward Stochastic Differential Equations and PDEs. Stéphane Crépey also had various consulting activities in the banking and financial engineering sector.
Introduction | Day 1: Problems, Concepts and Techniques | Day 2: Models
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Day 1: Problems, Concepts and Techniques | |
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Morning Session - Counterparty Risk Exposure: Introduction
Motivation and Definition
Exposure Metrics
- Potential Future Exposure PFE
- Expected Positive Exposure EPE, Expected Negative Exposure ENE
- Risk neutral vs real measure
Preliminary Examples
- Vanilla interest rate swaps
- FX and equity forwards and option
- Introduction to exotic products
- Exposure of portfolio of products
- Scenario consistency
Mitigation (controlling) of the Counterparty Risk
- Collateralization
- Netting agreements
- Close-out risk
Afternoon Session – Basics of Valuation and Hedging of Counterparty Exposure
Credit Valuation Adjustments (CVA)
- Unilateral valuation adjustments
- Bilateral valuation adjustments – Debit Valuation Adjustment (DVA)
- CVA as a Contingent CDS
Sensitivities
Hedging
- Mitigation vs hedging of the counterparty risk
- Dynamic hedging
- Mean-variance hedging
Wrong Way / Right Way Risk
- Examples
- Modeling
Day schedule: 09:00 – 17:00
Break: 10:30 – 10:45
Lunch: 12:30 – 13:30
Break: 15:15 – 15:30
Introduction | Day 1: Problems, Concepts and Techniques | Day 2: Models
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Day 2: Models | |
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Morning Session – Mathematical Models of Counterparty Risk Exposure
Cash Flows
- Clean cash flows (counterparty risk free)
- Counterparty risky cash flows
- Example: Counterparty risk in a CDS contract
Generic CVA Representation Formula
Models of Default and Credit Migrations
- single default
- reduced models
- structural models
- multiple defaults
- Markovian models
- credit migration
- Markovian models
Dynamics of Counterparty Risk
- Dynamics of Unilateral and Bilateral CVA
Mathematics of Hedging of the Counterparty Risk
Afternoon Session – Counterparty Credit Exposure: a Complete Solution
Portfolio Models of Underlying Risk Factors
- Interest rate and FX
- Equity
- A simple credit model
Pricing Techniques
- American Monte Carlo
Architecture
- Computational framework
- Payoff language
Day schedule: 09:00 – 17:00
Break: 10:30 – 10:45
Lunch: 12:30 – 13:30
Break: 15:15 – 15:30
Introduction | Day 1: Problems, Concepts and Techniques | Day 2: Models