Book description
The first decade of the 21st Century has been disastrous for financial
institutions, derivatives and risk management. Counterparty credit risk
has become the key element of financial risk management, highlighted by
the bankruptcy of the investment bank Lehman Brothers and failure of
other high profile institutions such as Bear Sterns, AIG, Fannie Mae and
Freddie Mac. The sudden realisation of extensive counterparty risks has
severely compromised the health of global financial markets.
Counterparty risk is now a key problem for all financial institutions.
This book explains the emergence of counterparty risk during the
recent credit crisis. The quantification of firm-wide credit exposure
for trading desks and businesses is discussed alongside risk
mitigation methods such as netting and collateral management
(margining). Banks and other financial institutions have been recently
developing their capabilities for pricing counterparty risk and these
elements are considered in detail via a characterisation of credit
value adjustment (CVA). The implications of an institution valuing
their own default via debt value adjustment (DVA) are also considered
at length. Hedging aspects, together with the associated instruments
such as credit defaults swaps (CDSs) and contingent CDS (CCDS) are
described in full.
A key feature of the credit crisis has been the realisation of
wrong-way risks illustrated by the failure of monoline insurance
companies. Wrong-way counterparty risks are addressed in detail in
relation to interest rate, foreign exchange, commodity and, in
particular, credit derivative products. Portfolio counterparty risk is
covered, together with the regulatory aspects as defined by the Basel
II capital requirements. The management of counterparty risk within an
institution is also discussed in detail. Finally, the design and
benefits of central clearing, a recent development to attempt to
control the rapid growth of counterparty risk, is considered.
This book is unique in being practically focused but also covering
the more technical aspects. It is an invaluable complete reference
guide for any market practitioner with any responsibility or interest
within the area of counterparty credit risk.
Dr Jon Gregory is a consultant specialising in the
area of counterparty risk. He started his career at Salomon Brothers
(now Citigroup). From 1997 to 2005, he worked for BNP Paribas,
initially developing the framework for the pricing and management of
counterparty risk for the fixed income division and later being part
of the rapid growth of the credit derivatives business. From 2005 to
2008, he was Global Head of Credit Analytics at Barclays Capital based
in London. He has published many papers in the area of credit risk,
recently looking at some of the complex counterparty risk issues in
relation to the credit crisis. In 2001, he was co-author of the book
Credit: The Complete Guide to Pricing, Hedging and Risk
Management, short-listed for the Kulp-Wright Book Award for the
most significant text in the field of risk management and
insurance.
Jon holds a PhD from Cambridge University.
