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A Stochastic Approach for the Quantification of Default Risk of OTC-Financial Derivatives

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  • Albrecht, Peter

    (Sonderforschungsbereich 504)

Abstract

The present paper has its focus on stochastic modelling the random variable credit loss (CL), corresponding to the cost of replacing the derivative in case the counterparty defaults. The evaluation of CL then is the starting point for risk management actions, e.g. setting risk limits or determining the appropriate amount of risk based capital. In a first approach to model CL knowledge of the random law of the default time of the counterparty (depending itself on the counterparty¦s rating class) is assumed. In a second approach information on the default time is not necessary and we work with the (pathwise) maximum of Brownian motion resp. of alternative stochastic processes.

Suggested Citation

  • Albrecht, Peter, 1997. "A Stochastic Approach for the Quantification of Default Risk of OTC-Financial Derivatives," Sonderforschungsbereich 504 Publications 97-28, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    • Handle: RePEc:xrs:sfbmaa:97-28
    Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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