Hi everyone,
I have a question regarding Counterparty Credit Exposure.
Given a Monte Carlo simulation for a Special Purpose Vehicle (SPV):
The point is to calculate the Capital required (for a 15 day period) to cover the positive exposure of Interest rate swaps transacted with One Counterparty in the event that the counterparty defaults.
The positive exposure is equal to the positive (in-the-money) Mark-to-market of the trades in the portfolio.
Usually the capital changes as a result of differences in the rates, volatility, or payments entering the 15 day period.
I ran into a situation at work, where the payments of the swap for one of the days netted to a negative amount. This means that the SPV was paying the counterparty on that particular day.
The capital required for that day increased. My colleague suggested that this is due to the payment from the SPV to the counterparty, increasing the MTM value of the trades in the portfolio.
I would understand if a payment was scheduled from the Counterparty to the SPV and it entered on the 15th day, the exposure would increase until it was paid. So the direct capital increases.
However, I'm not sure why the exposure would increase, or capital required would increase if the SPV is paying the counterparty. If this is the case...when would the MTM actually decrease? Whenever payments are actually paid at time 0?
I have a question regarding Counterparty Credit Exposure.
Given a Monte Carlo simulation for a Special Purpose Vehicle (SPV):
The point is to calculate the Capital required (for a 15 day period) to cover the positive exposure of Interest rate swaps transacted with One Counterparty in the event that the counterparty defaults.
The positive exposure is equal to the positive (in-the-money) Mark-to-market of the trades in the portfolio.
Usually the capital changes as a result of differences in the rates, volatility, or payments entering the 15 day period.
I ran into a situation at work, where the payments of the swap for one of the days netted to a negative amount. This means that the SPV was paying the counterparty on that particular day.
The capital required for that day increased. My colleague suggested that this is due to the payment from the SPV to the counterparty, increasing the MTM value of the trades in the portfolio.
I would understand if a payment was scheduled from the Counterparty to the SPV and it entered on the 15th day, the exposure would increase until it was paid. So the direct capital increases.
However, I'm not sure why the exposure would increase, or capital required would increase if the SPV is paying the counterparty. If this is the case...when would the MTM actually decrease? Whenever payments are actually paid at time 0?
