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Measuring and Mitigating Counterparty Risk
Attending the course will help you:
  • Learn how counterparty credit risk arises and why measuring it is difficult
  • Understand how counterparty credit risk may be mitigated through netting and collateralisation
  • Cover regulatory requirements related to counterparty risk, including the Basel III CVA charge

Course background

The course offers a comprehensive overview of the technical, operational and regulatory aspects of counterparty credit risk mitigation and management in derivatives markets.  Amongst topics that will be explored during the programme are constructing and interpreting measures of counterparty risk for derivative securities, showing how netting and collateral affect exposure and the problems posed by wrong-way risk.

Who should attend?

Participants should have prior knowledge of plain vanilla derivative securities (forwards, futures, swaps and options) and credit default swaps (CDS), including a basic understanding of how these contracts are priced and hedged.  They should have had exposure at an introductory level to statistical concepts such as variance, covariance and correlation.  No prior knowledge of counterparty credit risk management or simulation methods is assumed.

Course Tutor

David Oakes
David trained as an economist at the London School of Economics and was lecturer in finance at the University of Exeter and Warwick Business School before joining the ICMA Centre at the University of Reading as Director of Academic and Executive Education in 1998. He co-ordinated ICMA Executive Education programmes from 1994-2004. David left the Centre in 2004 to set up Dauphin Financial Training Limited, which specialises in advanced financial markets training to investment banks in New York.

Course Outline

Session 1a: Counterparty credit risk
  • What is counterparty credit risk?
  • Measurement, mitigation and management
  • Control and pricing (credit value adjustment)
  • Exercise 1: Counterparty credit risk

Session 1b: Mitigating counterparty credit risk: netting
  • ISDA Master Agreement
  • Close-out netting and credit exposure
  • Termination and trade compression
  • Exercise 2: Netting

Session 2: Mitigating counterparty credit risk: collateral

  • ISDA Credit Support Annex (CSA)
  • Mechanics of collateralisation
  • Exercise 3: Collateral

Session 2b: Mitigating counterparty credit risk: netting
  • Multilateral netting, collateralisation and loss absorption
  • Do central counterparties reduce counterparty risk
  • Exercise 4: Central clearing

Session 3: Measuring counterparty credit exposure
  • Credit exposure metrics (EE, PFE, EPE, effective EE and EPE)
  • Typical credit exposures for derivatives (forwards, swaps, options, CDS)
  • Add-ons and semi-analytic methods
  • Monte Carlo simulation
  • Exercise 5: Measuring counterparty exposure

Session 4: Impact of netting and collateral on exposure
  • Netting and correlation
  • Calculating incremental and marginal exposure
  • Exposure and collateral
  • Exercise 6: Impact of netting and collateral

Session 5: Default probabilities, credit spreads and credit derivatives
  • Real and risk-neutral default probabilities
  • Credit spreads
  • Credit default swaps
  • Calculating market-implied default probabilities
  • Portfolio counterparty credit risk, loan equivalents and alpha factors
  • Exercise 7: Default probabilities and CDS

Session 6: Pricing counterparty credit risk: CVA
  • Why should we price counterparty credit risk?
  • Credit Value Adjustment (CVA) with no wrong-way risk
  • CVA as a spread
  • Exercise 8: CVA

Session 7a: Pricing counterparty credit risk: DVA, BCVA and FVA
  • Debt Value Adjustment (DVA) and Bilateral CVA (BCVA)
  • Why DVA is controversial
  • Collateralisation, OIS discounting and Funding Value Adjustment (FVA)

Session 7b: Wrong-way risk

  • Sources of wrong-way (and right-way) risk
  • CVA with wrong-way risk
  • Measuring exposure with wrong-way risk
  • Wrong-way risk in credit derivatives
  • Exercise 9: CVA with wrong-way risk

Session 8a: Hedging counterparty credit risk

  • CVA as the cost of hedging counterparty risk
  • Exposure hedging and credit hedging

Session 8b: Wrong-way risk
  • Unexpected credit losses and economic capital
  • Basel II and credit portfolio risk
  • Basel III, counterparty credit risk and the CVA capital charge

Details of the next seminar


ICMA Limited
3rd Floor
23 College Hill
London EC4R 2RP
United Kingdom

Please email education@icmagroup.org to register your interest to attend our next publicly scheduled course.

Based at ICE Education London offices: IntercontinentalExchange® (NYSE: ICE), is a leading operator of regulated global futures exchanges, clearing houses and over-the-counter (OTC) markets.


£1,400 for members and £1,850 for non-members

Course materials will be provided to candidates in electronic format prior to the start of programme. Please ensure that you have access to this document during the course by either printing off a copy or by downloading it on your laptop, iPad or Tablet.

Should you require a hard copy of the course materials, there is a charge for printing off and sending the course materials to the training venue.  Please contact education@icmagroup.org a minimum of two weeks before the course start date for further details on this.

Payment can be made by secure online credit card or by invoice.

Terms and conditions

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Should you have any queries, please contact education@icmagroup.org.

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