Potential credit exposure on interest rate swaps
An analytical analogue to the Monte Carlo techniques previously used by banking supervisors to assess the potential credit exposure of interest rate swaps is developed, which permits a more thorough examination of swap exposure. This is done by using the Cox, Ingersoll and Ross (1985) one-factor model of the yield curve to generate interest rate paths from which swap credit exposure paths can be determined. Even with such a relatively simple interest rate process, the patterns of credit exposure are found to be more complex than the supervisors previous techniques allow: they vary with the level of interest rates, the slope of the yield curve and the volatility of the short rate - all factors which are ignored in the supervisors risk measurement methodology - and have a significantly non-linear relationship with swap maturity. In conclusion, market traders and regulators need to be alert to these factors in determining the appropriate level of capital to hold as protection against counterparty default.
|Date of creation:||Aug 1994|
|Contact details of provider:|| Postal: Bank of England, Threadneedle Street, London, EC2R 8AH|
Phone: +44 (0)171 601 4030
Fax: +44 (0)171 601 5196
Web page: http://www.bankofengland.co.uk/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Paul Fisher & Juna Vega, 1993. "An Empirical Analysis of M4 in the United Kingdom," Bank of England working papers 21, Bank of England.
When requesting a correction, please mention this item's handle: RePEc:boe:boeewp:25. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Digital Media Team)
If references are entirely missing, you can add them using this form.