CONCLUDING REMARKS
The identification and measurement of credit exposures plays a key role in financial analysis of credit portfolios. Uncollateralized instruments imply a high degree of exposures, i.e., in most cases equal to the gross amount.
However, most contracts are collateralized and/or have good expectation of recovering rates. This reduces the net exposures which indicate the losses when risk events may rise during the lifetime of financial contracts. A great challenge in the exposure analysis is its evolution at future times. The main analysis elements considered in such evolution are the future market conditions, counterparty credit status, expected behaviour, type of contracts, valuation principles and future strategies of re-constructing the credit portfolio. Based on different paths of real world probabilities, a distribution of future exposures can be simulated. This is the basis for measuring additional types of exposures used mainly in risk and profitability management. Both market and counterparty risks result in credit losses. The estimation of the expected losses is defined by considering the credit exposures and the actual or potential status of credit events. Finally, credit exposures can be the basis of identifying the links among counterparties used in systemic and concentration risk, as discussed in Chapter 11.NOTES
1. Some practitioners may also consider the expected recovery, discussed in Chapter 8 (Behavior Risk) in the estimation of net exposure that may result in further reduction. Such an approach however is mixing the well measured CE with unknown assumed expected behavior of recovery that is almost impossible to measure with high confidence of precision.
2. This appears when the duration of credit enhancements is shorter than the duration of the contract’s life time.
3. Could be also another point with the time intervals.
4. ISDA (2001), “Letter to Mr Gresser, 7 September 2001,” http://www.isda.org/c_and_a/pdf/ RGresserLetter-Sept701.pdf, date accessed 25 May 2015.