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Close-out risk. Help asap needed

Posted: June 27th, 2007, 6:52 pm
by Polysena
Does someone know what is meant by this?1. is it related with close-out and netting procedures2. or more generally with unwinding positions.I have seen also close-out exposurehow would these things be related if ever.Thank you in advance.

Close-out risk. Help asap needed

Posted: June 29th, 2007, 1:57 pm
by RealIllusion
Are you referring to the close-out component of credit risk, which comes into play when a counterparty defaults? If a bank has a number of open trades with a defaulting counterparty, some of these trades will probably have positive exposure, i.e. there is value in the trades and the bank will lose money due to the counterparty defaulting. Close-out risk relates to the possibility that the exposure on these open positions may increase further during the period (typically a few days) it takes to close out these positions. As I understand it "unwinding" and "closing out" are synonymous. If there is a netting agreement in place the bank may be able to offset the losses against gains from negative exposes - this may be relevant for reporting purposes, Basel II compliance etc.

Close-out risk. Help asap needed

Posted: June 29th, 2007, 7:19 pm
by Polysena
QuoteOriginally posted by: RealIllusionAre you referring to the close-out component of credit risk, which comes into play when a counterparty defaults? If a bank has a number of open trades with a defaulting counterparty, some of these trades will probably have positive exposure, i.e. there is value in the trades and the bank will lose money due to the counterparty defaulting. Close-out risk relates to the possibility that the exposure on these open positions may increase further during the period (typically a few days) it takes to close out these positions. As I understand it "unwinding" and "closing out" are synonymous. If there is a netting agreement in place the bank may be able to offset the losses against gains from negative exposes - this may be relevant for reporting purposes, Basel II compliance etc.Yes in the meantime I was able to figure this out... but your post is very clear.... thank you for writting. I am very grateful...

Close-out risk. Help asap needed

Posted: June 29th, 2007, 7:27 pm
by Polysena
oops