Tag Archives: EAD

The dreadful 40-60 rule

When we have to calculate exposure at default (EAD) on a particular trade, we seldom have to compute it analytically (e.g. as shown here). More often we just take the current MtM of the trade and add the so-called add-on. … Continue reading

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Historical or implied?

To calculate counterparty exposure, we need to calibrate our scenario generator to historical data. However, for CVA calculations, we need scenarios based on implied volatilities of the underlying risk factors. Continue reading

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Exposures are not additive: case in point

Potential exposure is not additive: the total exposure on two trades can be very different than the sum of potential exposures on each trade. Continue reading

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