Credit risk management

1. Example Index
Copyright 2018 CapitaLogic Limited
Example Description Excel technique
1 On balance sheet netting
2 Collateral
3 Margining of currency trading
4 Herfindahl–Hirschman Index
5 Credit limit
6 Numerical integration
7 Average LGD
This Excel workbook is prepared in accordance with
Chapter 6 of the text book
"Managing Credit Risk Under The Basel III Framework, 3
rd
ed"
Authored by :Dr. LAM Yat-fai (林日辉)
Principal, Structured Products Analytics, CapitaLogic Limited
Adjunct Professor of Finance, City University of Hong Kong
Doctor of Business Administration
CFA, CAIA, CAMS, FRM, PRM
Website: https://sites.google.com/site/crmbase
E-mail: crmbasel@gmail.com
Copyright 2018 CapitaLogic Limited

2. Example 1 On balance sheet netting
Lending Borrowing
Principal 2,000,000 1,000,000 USD
Interest rate 10% 8% per year
Interest frequency 12 12 per year
RM 3 2 years
Gross EAD 2,016,667 1,006,667
Net EAD 1,010,000
Copyright 2018 CapitaLogic Limited

3. Example 2 Collateral
EAD 1,000,000
Property price 800,000
LGD 20%
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4. Example 3 Margining
Date USD per EUR EUR 1 mn Margin deposited Collateral value Margin left
04 Jan 2016 1.08296 1082960 5% 1137108 5.00%
05 Jan 2016 1.07539 1075390 1129538 4.30%
06 Jan 2016 1.07768 1077680 1131828 4.51%
07 Jan 2016 1.09218 1092180 1146328 5.85%
08 Jan 2016 1.09207 1092070 1146218 5.84%
11 Jan 2016 1.08625 1086250 1140398 5.30%
12 Jan 2016 1.08481 1084810 1138958 5.17%
13 Jan 2016 1.08824 1088240 1142388 5.49%
14 Jan 2016 1.08617 1086170 1140318 5.30%
15 Jan 2016 1.09187 1091870 1146018 5.82%
18 Jan 2016 1.0891 1089100 1143248 5.57%
19 Jan 2016 1.09141 1091410 1145558 5.78%
20 Jan 2016 1.0891 1089100 1143248 5.57%
21 Jan 2016 1.08712 1087120 1141268 5.38%
22 Jan 2016 1.07975 1079750 1133898 4.70%
25 Jan 2016 1.08501 1085010 1139158 5.19%
26 Jan 2016 1.08659 1086590 1140738 5.34%
27 Jan 2016 1.0903 1090300 1144448 5.68%
28 Jan 2016 1.0938 1093800 1147948 6.00%
29 Jan 2016 1.08331 1083310 1137458 5.03%
01 Feb 2016 1.08897 1088970 1143118 5.55%
02 Feb 2016 1.09247 1092470 1146618 5.88%
03 Feb 2016 1.10817 1108170 1162318 7.33%
04 Feb 2016 1.12007 1120070 1174218 8.43%
05 Feb 2016 1.11534 1115340 1169488 7.99%
08 Feb 2016 1.11999 1119990 1174138 8.42%
09 Feb 2016 1.12878 1128780 1182928 9.23%
10 Feb 2016 1.12785 1127850 1181998 9.15%
11 Feb 2016 1.13142 1131420 1185568 9.47%
Copyright 2018 CapitaLogic Limited

5. Example 4 Herfindahl–Hirschman Index
Debt EAD LGD PD RM EL
1 9923 64.68% 0.11% 1.43 10.09582 HHI 0.062789
2 12179 55.47% 0.50% 0.74 24.99606
3 10853 54.51% 2.47% 2.18 318.5513
4 8341 56.40% 2.13% 1.62 162.3274
5 7664 52.61% 0.01% 0.35 0.141121
6 10803 48.70% 1.21% 1.07 68.11496
7 11904 61.23% 1.05% 0.03 2.295978
8 9999 67.70% 0.87% 0.49 28.85762
9 10590 74.40% 2.15% 2.27 384.5326
10 7042 64.49% 1.53% 2.4 166.7597
11 11024 54.11% 2.25% 1.79 240.2439
12 10629 56.92% 2.04% 0.07 8.639438
13 6663 54.43% 1.64% 1.43 85.05269
14 7485 56.72% 1.30% 0.28 15.45359
15 8557 58.46% 1.97% 2.28 224.6888
16 7121 51.24% 1.39% 0.85 43.11058
17 6868 61.70% 1.43% 2.8 169.6717
18 11389 66.17% 1.36% 1.25 128.1137
19 11958 74.74% 1.52% 1.27 172.5277
20 9746 78.37% 3.03% 1.31 303.1728
21 11530 70.33% 4.04% 0.47 153.9746
22 13370 59.59% 5.30% 1.64 692.5075
23 11236 41.50% 2.86% 1.76 234.7137
24 11384 44.03% 2.06% 1.14 117.7106
25 10335 44.98% 2.18% 0.54 54.7243
26 11019 44.94% 2.86% 0.44 62.3152
27 9508 66.15% 2.52% 1.71 271.0289
28 11331 66.07% 2.27% 0.19 32.28881
29 11604 48.92% 2.15% 2.99 364.9252
30 7947 54.37% 2.33% 2.72 273.834
Copyright 2018 CapitaLogic Limited

6. Example 5 Credit limit
AA A BBB BB B
PD 0.0333% 0.0834% 0.3345% 2.5652% 7.1682%
CCC 0.238015918 0.235098733 0.221521075 0.153277143 0.123331358
XCDR 0.014960774 0.029964275 0.077046648 0.210932402 0.343159999
LGD 60% 65% 70% 75% 80%
MPDL 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
NOB 1,000 1,000 1,000 1,000 1,000
Portfolio credit limit 111,402,434 51,343,193 18,541,643 6,321,140 3,642,616
Borrower credit limit 111,402 51,343 18,542 6,321 3,643
Copyright 2018 CapitaLogic Limited

7. Example 6 Numerical integration
Lower limit 1 2 3
Upper limit 2 3 4
x 1 2 3
f(x) 1 14.77811 0.366204
F(x) 3.75 32.78202 0.357432
Copyright 2018 CapitaLogic Limited

8. Example 7 Average LGD
Month EAD Collateral CER Drift Monthly Annual Current CER q0 0.888491
0 10,000 10000 1.0000 Drift -0.0033 -0.0394 Drift µ -0.0394
1 10,100 9923 0.9825 -0.0177 Volatility 0.0217 0.0751 Volatility σ 0.0751
2 10,200 9771 0.9579 -0.0253 Time t 1
3 10,300 9667 0.9385 -0.0205 PD 10%
4 10,400 9717 0.9343 -0.0045 Hazard rate 10.5361% d1 -2.0621
5 10,500 9696 0.9234 -0.0117 d2 -2.1372
6 10,600 9686 0.9138 -0.0105 Today 0 Φ(-d1) 0.9804
7 10,100 9627 0.9532 0.0422 T 1 Φ(-d2) 0.9837
8 10,200 9398 0.9214 -0.0339 t 1
9 10,300 9497 0.9220 0.0007 Integrand 0.1387 E[LGD(t)] 14.6293%
10 10,400 9522 0.9156 -0.0070 Average LGD 12.8615%
11 10,500 9611 0.9153 -0.0003
12 10,600 9686 0.9138 -0.0017
13 10,100 9622 0.9527 0.0417
14 10,200 9743 0.9552 0.0026
15 10,300 9817 0.9531 -0.0022
16 10,400 9748 0.9373 -0.0167
17 10,500 9720 0.9257 -0.0124
18 10,600 9971 0.9407 0.0160
19 10,100 9882 0.9784 0.0394
20 10,200 10034 0.9837 0.0054
21 10,300 9958 0.9668 -0.0174
22 10,400 9960 0.9577 -0.0095
23 10,500 9992 0.9516 -0.0064
24 10,600 9845 0.9288 -0.0243
25 10,100 9867 0.9769 0.0506
26 10,200 9720 0.9529 -0.0249
27 10,300 9671 0.9389 -0.0148
28 10,400 9577 0.9209 -0.0194
29 10,500 9628 0.9170 -0.0043
30 10,600 9472 0.8936 -0.0258
31 10,100 9442 0.9349 0.0451
32 10,200 9486 0.9300 -0.0052
33 10,300 9494 0.9217 -0.0089
34 10,400 9547 0.9180 -0.0041
35 10,500 9457 0.9007 -0.0190
36 10,600 9418 0.8885 -0.0136
Copyright 2018 CapitaLogic Limited