Managing Credit Risk by Counterparty Selection
In cases where counterparties, e.g. prime brokers, do not post collateral and CDS protection is prohibitively expensive, hedge funds tend to manage credit risk through counterparty selection.

This typically entails choosing the counterparty with the lowest aggregate current exposure (mark-to-market value) for the next OTC transaction. The problem with this approach is that it doesn’t take into account the potential level of current exposure on future dates.

Hedge funds that manage credit risk by selecting counterparties with the lowest current exposure are not necessarily minimizing counterparty risk. Depending on the composition of the portfolio and underlying risk factors, a new transaction may add substantial exposure to a portfolio even if its current exposure is relatively low. This whitepaper will step through an example where choosing a counterparty with lower current exposure can result in greater counterparty risk.

Request A Copy



The Growth of Relative Value Credit Strategies

The use of relative value credit analytics is not new, but the importance of this methodology has come into sharper focus and has been the subject of increased investor attention over the last 12 months.


How to Manage Cryptoasset Credit Risk

The Global Financial Crisis (GFC) of 2008 underscored the importance of credit risk in the financial markets. Since 2008, regulatory reform has been introduced to restore stability and confidence in the banking industry.


A First View on the New CVA Risk Capital Charge

In July 2015, the Basel Committee of Banking Supervision (BCBS) published a consultative paper on credit valuation adjustment (CVA) risk to improve the current regulatory framework. In February 2016, first improvements of this framework have been introduced within the QIS instructions for the QIS based on December 2015 results.

Let's Talk!

Schedule a personalised demo today