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Counterparty Risk Subject To ATE

Author

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  • Zhou, Richard

Abstract

Rating trigger ATE (Additional Termination Event) is a counterparty risk mitigant that allows banks to terminate and close out bilateral derivative contracts if the credit rating of the counterparty falls below the trigger level. Since credit default is often preceded by rating downgrades, ATE clause effectively reduces the counterparty credit risk by early termination of exposure. However, there is still the risk that counterparty may default without going through severe downgrade. This article presents a practical model for valuating CVA in the presence of ATE.

Suggested Citation

  • Zhou, Richard, 2010. "Counterparty Risk Subject To ATE," MPRA Paper 28067, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:28067
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    File URL: https://mpra.ub.uni-muenchen.de/28067/1/MPRA_paper_28067.pdf
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    References listed on IDEAS

    as
    1. Robert A. Jarrow & David Lando & Stuart M. Turnbull, 2008. "A Markov Model for the Term Structure of Credit Risk Spreads," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 18, pages 411-453, World Scientific Publishing Co. Pte. Ltd..
    2. Robert B. Israel & Jeffrey S. Rosenthal & Jason Z. Wei, 2001. "Finding Generators for Markov Chains via Empirical Transition Matrices, with Applications to Credit Ratings," Mathematical Finance, Wiley Blackwell, vol. 11(2), pages 245-265, April.
    3. Damiano Brigo & Kyriakos Chourdakis, 2009. "Counterparty Risk For Credit Default Swaps: Impact Of Spread Volatility And Default Correlation," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 12(07), pages 1007-1026.
    4. Damiano Brigo & Massimo Morini, 2010. "Dangers of Bilateral Counterparty Risk: the fundamental impact of closeout conventions," Papers 1011.3355, arXiv.org.
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    Cited by:

    1. Tomasz R. Bielecki & Igor Cialenco & Ismail Iyigunler, 2012. "Collateralized CVA Valuation with Rating Triggers and Credit Migrations," Papers 1205.6542, arXiv.org.
    2. Tomasz R. Bielecki & Igor Cialenco & Ismail Iyigunler, 2013. "Collateralized Cva Valuation With Rating Triggers And Credit Migrations," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 16(02), pages 1-32.

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    More about this item

    Keywords

    Counterparty Risk; Credit Valuation Adjustment; Rating Transition; Rating Trigger; Additional Termination Event;
    All these keywords.

    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General

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