Measuring Credit Risk of Derivative Contracts

Financial services professionals, consultants, sales professionals interested in providing or selling products and services to banks, investment companies, financial corporations, and anyone interested in understanding counterparty credit risks and techniques for their mitigation

Please contact us for information about prerequisites.

Expected Duration
60 minutes

The size of the global derivatives market has by some estimates reached a notional value of a quadrillion dollars. Among the primary users of derivatives are commodity-based corporations, banks, pension funds, insurance companies, mutual funds, hedge funds, and private investors. The credit worthiness of different parties to these contracts has been under focus since the credit crisis of 2008, which led to many institutions going bankrupt due to a lack of focus on credit risk. Credit risk has emerged as the major risk in dealing with derivative contracts. In order for derivatives users to manage the associated credit risk, they must develop models and procedures required to measure credit risk in monetary terms.
This course identifies the sources of credit risk in widely used derivatives, with a distinction made between over-the-counter versus market traded derivatives. The course also introduces the credit equivalent risk framework, which utilizes statistical techniques to determine a risk factor that is used as an input to determine potential credit loss. In determining potential credit loss, the course also considers the probability of default and recovery rates determined through a credit rating process, analysts’ judgements, and other information sources.


Measuring Credit Risk of Derivative Contracts

  • identify the reasons for credit risk for derivatives
  • identify the formula for calculating credit equivalent risk
  • describe the general process for measuring credit risk of derivatives

Credit Risk Calculations of Derivative Contracts

  • identify how to apply the credit equivalent risk framework to over-the-counter options
  • identify how to apply the credit equivalent risk framework to swap contracts
  • recognize how the credit equivalent risk is used to determine the potential credit loss
  • recognize the credit risk calculations for derivative contracts





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