Introduction
Credit Exposure (CE) is calculatd from the maximal mark-to-market (MtM) obtained over a an appropriate risk horizon to a confidence level. These maximal MTMs are obtained by considering theconfidence level cone of future values of the underlying risk factor and then conservatively estimating the market value of the derivative at the risk horizon within these maximal scenarios.
Without a CSA Agreement
Without a CSA agreement the risk horizon is all the way to maturity, t=T. The credit exposure is estimated as the larger of:
- Current MtM
- Maximal intrinsic value at maturity
Without a CSA Agreement
With a CSA agreement the MtM is reset to zero with each margin call, hence the risk horizon is the margin period of risk (or the remaining maturity if shorter). The credit exposure is estimated as the larger of:
- Maximal increase in MtM over a margin period of risk
- Maximal intrinsic value over the next margin period of risk