Interest Rate Modelling for Counterparty Credit Risk

Ooms, J.C.

Interest Rate Modelling for Counterparty Credit Risk

Master thesis (2015)

Authors

J.C. Ooms

Contributors

C.W. Oosterlee (mentor)

Programme

Applied Mathematics

Monte Carlo simulation Counterpary credit risk Capital calculation Risk mitigation Interest rate modelling Exposure at default

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Published Date

09-04-2015

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Programme

Applied Mathematics

Abstract

In this thesis we describe a general framework to determine counterparty credit risk. Interest rates as risk factor will in this framework be generated by a Monte Carlo simulation and described by means of a stochastic model. We describe three equilibrium models that can apply the interest rate simulation. The characteristics of these models on risk factor level are compared by stochastic evolution, volatility analysis and the discrete likelihood method. These models are furthermore applied in the current low-rate environment to assess exposure for counterparties and two example interest rate products: the forward rate agreement and the interest rate swap. The quality of these models will then be assessed from the computed exposure and characteristics on risk factor level.

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