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ronm
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Posts: 163
Joined: June 8th, 2007, 9:00 am

Counterparty exposure calculation

April 15th, 2014, 4:17 pm

Hi again,I was attending an interview where I was asked on calculation the Future exposure (counter party credit risk) for a long call option, european payoff in 1 year. This option also expires in 1 year. I argued that, since it is european long call option, the positive exposure to me will be only at the expiry time i.e. 1 year. Before that i.e. during this 1 year there will not be any positive exposure. However interviewer disagree.What you think on this? Is interviewer correct?Thanks for your insight.
 
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daveangel
Posts: 17031
Joined: October 20th, 2003, 4:05 pm

Counterparty exposure calculation

April 15th, 2014, 4:22 pm

of course you have an exposure prior to expiry.
knowledge comes, wisdom lingers
 
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ronm
Topic Author
Posts: 163
Joined: June 8th, 2007, 9:00 am

Counterparty exposure calculation

April 15th, 2014, 4:25 pm

I do have... however from counterparty credit exposure perspective no cash flow is happening before 1 year to me. Then how will be the likelihood to default? To me, default from counterparty will happen after 1 year and if I am in the money.Am I missing something?
 
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daveangel
Posts: 17031
Joined: October 20th, 2003, 4:05 pm

Counterparty exposure calculation

April 15th, 2014, 6:26 pm

QuoteOriginally posted by: ronmI do have... however from counterparty credit exposure perspective no cash flow is happening before 1 year to me. Then how will be the likelihood to default? To me, default from counterparty will happen after 1 year and if I am in the money.Am I missing something?Counterparty can default on other obligations they have. Also, you want to estimate you Potential Future Exposure.
knowledge comes, wisdom lingers
 
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Samsaveel
Posts: 436
Joined: April 20th, 2008, 5:47 am

Counterparty exposure calculation

April 19th, 2014, 1:11 pm

it is in a way similar to the concept of wrong way risk ,the more the trade is ITM from your perspectivethe higher the probability that the Cpty wll not be able to meet the contractual agreement at expiry,and so the likelihood that they default rises.
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