Presentation is loading. Please wait.

Presentation is loading. Please wait.

Valuation of IR Derivatives in a new Regulatory Environment

Similar presentations


Presentation on theme: "Valuation of IR Derivatives in a new Regulatory Environment"— Presentation transcript:

1 Valuation of IR Derivatives in a new Regulatory Environment
Speakers: Eduardo Pereira Risk and Regulation Specialist: Bloomberg L.P Bernardo Santos Andrade Senior Manager, Toyota Motor Finance (Netherlands) B.V Dutch Association of Corporate Treasurers Event: Hotels Van Oranje, Noordwijk, The Netherlands. 11th November 2013.

2 OIS Discounting: A new valuation framework; CSA Agreements; CVA;
CSA Agreements – Bloomberg ‘MARS’ solution; TMFNL: Collateral Operation Case Study. Agenda

3 OIS Discounting

4 Overview of OIS Framework
Prior to Credit Crisis credit & liquidity effects were largely ignored in IR derivatives pricing Subsequent to Credit Crisis Stronger Focus on Counterparty Risk (Credit) Evaluating Exposure Risk Management Stronger Focus on Funding (Liquidity) Divergence between “risk free” rates and funding levels Funding arbitrage opportunities New framework required as credit & liquidity effects can no longer be ignored in pricing Overview of OIS Framework

5 26th Oct 2005: 10MM EUR 7yr Pay 3.10%, q/q

6 IR swaps can have both negative or positive values
If market value is positive Counterparty owes money And if counterparty defaults Loss for everything that can’t be recovered Credit mitigation very important Changes in Regulation Banks to be penalised for uncollateralised swaps Counterparty Risk

7 Swaps in the Interbank Market
Mitigating credit exposure (interbank) Netting Agreements Credit Support Annex (CSA) agreement Central Counterparty (CCP) clearing CSA: Collateral posted between counterparties CCP (e.g. LCH.Clearnet): “Variation Margin” paid (or received) each day by clearing member (in addition to “Initial margin”) Both CSAs & CCP define how interest accrues on funds (collateral or margin payments) Swaps in the Interbank Market

8 Credit & Liquidity Premium in Euribor
LOIS EUR <GO>

9 Credit & Liquidity Premium in Euribor
Credit Crunch: Market First Fears

10 Credit & Liquidity Premium in Euribor Bear Stearns ‘Bailout’

11 Credit & Liquidity Premium in Euribor
Lehman Bankruptcy

12 Credit & Liquidity Premium in Euribor
Ireland Crisis

13 Counterparty Risk IR swaps can have both negative or positive values
If market value is positive Counterparty owes money And if counterparty defaults Loss for everything that can’t be recovered Credit mitigation very important Banks generally have agreements to post collateral to each other Credit Support Annex (CSA) agreement Central Counterparty Clearing (CCC) Generally corporates do not wish to sign CSAs or agree to CCCs Both parties exposed to counterparty risk Counterparty Risk

14 Counterparty Valuation Adjustments

15 Webinar Poll 2 - Question
For a swap how do you currently determine what you are being charged for your credit risk? By using the Bloomberg CVA/DVA calculator  My relationship banks provide full disclosure on these charges  Unaware of any such charges  We calculate using other methods   We do not get charged   Webinar Poll 2 - Question

16 Webinar Poll 2 Results

17 Calculating Credit Spreads
CVA/DVA Calculator

18 Calculating Credit Spreads
Calculate Exposure from Counterparties Perspective

19 Calculating Credit Spreads
Market Information: Credit, Rates & Volatility

20 Calculating Credit Spreads DVA: Cost to Bank of Corporate Defaulting

21 Calculating Credit Spreads
CVA Calculation: Cost to Corporate of Bank Defaulting

22 Calculating Credit Spreads Bilateral Calculation

23 Bilateral Calculation
Exposure Graph Bilateral Calculation

24 Charting Net Cash Flows Net Cash Flows affect Exposures

25

26

27

28

29

30

31

32

33

34

35


Download ppt "Valuation of IR Derivatives in a new Regulatory Environment"

Similar presentations


Ads by Google