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FRM reading Counterparty Credit Risk and Credit Value Adjustment (2nd Ed) by Jon Gregory 2016-09-16

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Chapter 3: Defining Counterparty Credit Risk [CR – 9]
  • Describe counterparty risk and differentiate it from lending risk.
  • Describe transactions that carry counterparty risk and explain how counterparty risk can arise in each transaction.
  • Identify and describe institutions that take on significant counterparty risk.
  • Describe credit exposure, credit migration, recovery, mark-to-market, replacement cost, default probability, loss given default, and the recovery rate.
  • Identify and describe the different ways institutions can manage and mitigate counterparty risk.
Chapter 4: Netting, Compression, Resets, and Termination Features [CR – 10]
  • Explain the purpose of an ISDA master agreement.
  • Summarize netting and close-out procedures (including multilateral netting), explain their advantages and disadvantages, and describe how they fit into the framework of the ISDA master agreement.
  • Describe the effectiveness of netting in reducing credit exposure under various scenarios.
  • Describe the mechanics of termination provisions and trade compressions and explain their advantages and disadvantages.
Chapter 5: Collateral [CR – 11]
  • Describe the rationale for collateral management.
  • Describe features of a credit support annex (CSA) within the ISDA Master Agreement.
  • Describe the role of a valuation agent.
  • Describe types of collateral that are typically used.
  • Explain the process for the reconciliation of collateral disputes.
  • Explain the features of a collateralization agreement.
  • Differentiate between a two-way and one-way CSA agreement and describe how collateral parameters can be linked to credit quality.
  • Explain how market risk, operational risk, and liquidity risk (including funding liquidity risk) can arise through collateralization.
Chapter 7: Central Counterparties [CR – 12]
  • Explain the objectives and functions of central counterparties (CCPs).
  • Discuss the strengths and weaknesses of CCPs.
  • Describe the different CCP netting schemes, the benefit of netting and distinguish between bilateral netting and multilateral netting.
  • Discuss the key challenges in relation to the clearing of over-the-counter (OTC) derivative products.
  • Describe the three types of participants that channel trade through a CCP.
  • Explain the loss waterfall in a CCP structure.
  • Define initial margin and variation margin and describe the different approaches and factors in calculating initial margin.
  • Discuss the impact of initial margin on prices, volume, volatility, and credit quality.
  • Explain factors that can lead to failure of a CCP and discuss measures to protect CCPs from default.
Chapter 8 Credit Exposure [CR – 13]
  • Describe and calculate the following metrics for credit exposure: expected mark-to-market, expected exposure, potential future exposure, expected positive exposure and negative exposure, effective exposure, and maximum exposure.
  • Compare the characterization of credit exposure to VaR methods and describe additional considerations used in the determination of credit exposure.
  • Identify factors that affect the calculation of the credit exposure profile and summarize the impact of collateral on exposure.
  • Identify typical credit exposure profiles for various derivative contracts and combination profiles.
  • Explain how payment frequencies and exercise dates affect the exposure profile of various securities.
  • Explain the impact of netting on exposure, the benefit of correlation, and calculate the netting factor.
  • Explain the impact of collateralization on exposure, and assess the risk associated with the remargining period, threshold, and minimum transfer amount.
  • Explain the difference between risk-neutral and real-world parameters, and describe their use in assessing risk.
Chapter 10: Default Probability, Credit Spreads, and Credit Derivatives [CR – 14]
  • Distinguish between cumulative and marginal default probabilities.
  • Calculate risk-neutral default probabilities, and compare the use of risk-neutral and real-world default probabilities in pricing derivative contracts.
  • Compare the various approaches for estimating price: historical data approach, equity based approach, and risk neutral approach.
  • Describe how recovery rates may be estimated.
  • Describe credit default swaps (CDS) and their general underlying mechanics.
  • Describe the credit spread curve and explain the motivation for curve mapping.
  • Describe types of portfolio credit derivatives.
  • Describe index tranches, super senior risk, and collateralized debt obligations (CDO).
Chapter 12: Credit Value Adjustment [CR – 15]
  • Explain the motivation for and the challenges of pricing counterparty risk.
  • Describe credit value adjustment (CVA).
  • Calculate CVA and the CVA spread with no wrong-way risk, netting, or collateralization.
  • Evaluate the impact of changes in the credit spread and recovery rate assumptions on CVA.
  • Explain how netting can be incorporated into the CVA calculation.
  • Define and calculate incremental CVA and marginal CVA, and explain how to convert CVA into a running spread.
  • Explain the impact of incorporating collateralization into the CVA calculation.
Chapter 15: Wrong-Way Risk [CR – 16]
  • Describe wrong-way risk and contrast it with right-way risk.
  • Identify examples of wrong-way risk and examples of right-way risk.
David Harper CFA FRM
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Thank you David - appreciate it! A great resource!!