Quantifying Swap Credit Risk

Abstract

The prevalence of vanilla and exotic swaps in the financial system means that the calculation of swap credit risk exposure remains a vital topic for financial institutions, corporate end users, and regulatory agencies. Given the complex characteristics of swap contracts, it comes as no surprise that there is no single accepted way of computing swap credit risk; much ultimately depends on the views and preferences of individual institutions and regulators. Though methodologies vary, we can consider two broad approaches: calculation of risk exposure for regulatory purposes and calculation of risk exposure for internal measurement and management purposes. In certain instances these approaches may be similar.