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Assessing Credit Risk in a Financial Institution's Off-Balance Sheet Commitments

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  • Hull, John

Abstract

The first part of this paper presents a general approach to valuing a financial institution's contracts when there is credit risk. The approach uses contingent claims pricing theory and is particularly appropriate for an off-balance sheet contract, such as a swap, that can have either a positive or a negative value to the counterparty. The second part of the paper extends the analysis by considering the problem, faced by bank supervisory authorities, of determining capital requirements for off-balance sheet contracts.

Suggested Citation

  • Hull, John, 1989. "Assessing Credit Risk in a Financial Institution's Off-Balance Sheet Commitments," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(4), pages 489-501, December.
    • Handle: RePEc:cup:jfinqa:v:24:y:1989:i:04:p:489-501_01
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    Cited by:

    1. J. C. Arismendi-Zambrano & Vladimir Belitsky & Vinicius Amorim Sobreiro & Herbert Kimura, 2020. "The Implications of Tail Dependency Measures for Counterparty Credit Risk Pricing," Economics Department Working Paper Series n306-20.pdf, Department of Economics, National University of Ireland - Maynooth.
    2. Coppes, Robert Christophor & Stokking, Evert Jan, 1996. "Credit risk exposure with interest and currency swaps," European Journal of Operational Research, Elsevier, vol. 91(2), pages 338-345, June.
    3. Avouyi-Dovi, S. & Jondeau, E., 1999. "Modelling the French Swap Spread," Working papers 65, Banque de France.
    4. Cossin, Didier & Pirotte, Hugues, 1997. "Swap credit risk: An empirical investigation on transaction data," Journal of Banking & Finance, Elsevier, vol. 21(10), pages 1351-1373, October.
    5. Minton, Bernadette A., 1997. "An empirical examination of basic valuation models for plain vanilla U.S. interest rate swaps," Journal of Financial Economics, Elsevier, vol. 44(2), pages 251-277, May.
    6. Hull, John & White, Alan, 1995. "The impact of default risk on the prices of options and other derivative securities," Journal of Banking & Finance, Elsevier, vol. 19(2), pages 299-322, May.
    7. Lang, Larry H. P. & Litzenberger, Robert H. & Luchuan Liu, Andy, 1998. "Determinants of interest rate swap spreads," Journal of Banking & Finance, Elsevier, vol. 22(12), pages 1507-1532, December.
    8. Duffee, Gregory R., 1996. "On measuring credit risks of derivative instruments," Journal of Banking & Finance, Elsevier, vol. 20(5), pages 805-833, June.
    9. Andrew H. Chen & Mohammed M. Chaudhury, 1996. "The Market Value and Dynamic Interest Rate Risk of Swaps," Center for Financial Institutions Working Papers 96-44, Wharton School Center for Financial Institutions, University of Pennsylvania.
    10. Arismendi-Zambrano, Juan & Belitsky, Vladimir & Sobreiro, Vinicius Amorim & Kimura, Herbert, 2022. "The implications of dependence, tail dependence, and bounds’ measures for counterparty credit risk pricing," Journal of Financial Stability, Elsevier, vol. 58(C).
    11. Simon Wolfe, 2000. "Structural effects of asset-backed securitization," The European Journal of Finance, Taylor & Francis Journals, vol. 6(4), pages 353-369.

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