Credit Exposure Metrics (EFV, EE, PFE) for Interest Rate Swap | FRM Part 2

[@finRGB]

*FRM Learning Objectives* : 1. Describe and calculate the following metrics for credit exposure: expected mark-to-market, expected exposure, potential future exposure, expected positive exposure and negative exposure, effective expected positive exposure, and maximum exposure. 2. Identify factors that affect the calculation of the credit exposure profile and summarize the impact of collateral on exposure. 3. Identify typical credit exposure profiles for various derivative contracts and combination profiles.

[@demoiido7655]

This is the most easy to understand explanation i have ever heard! Thank you so much!

[@finRGB]

Glad you found the video helpful, @demoiido7655.

[@timeouttales1]

this is incredible and so easy to follow!

[@finRGB]

Thank you for the kind words.

[@timeouttales1]

@@finRGB if we look at the opposite scenario i.e. pay floating receive fixed - wondering how will the time profile look like i.e. will EFV be negative? And how should we look at EE and PFE in that case?

[@finRGB]

@@timeouttales1 Eventually, these metrics come from the distribution (pdf) of trade value at chosen time horizon(s). For the opposite trade than the one presented here, the sign of trade value will be opposite (i.e. negated). This amounts to flipping the distribution (pdf) about the vertical axis. From that flipped distribution, you then go about calculating the different metrics the same way as we did in the video.

[@raviraja3801]

What an amazing crystal clear explanation. Highly recommended for students/ professionals entering the Risk Management profile and want to learn how exposure actually varies with time. Thanks again for this wonderful video. 👍

[@finRGB]

Thank you for the appreciation, Ravi.

[@abhi5993]

How should we make the initial assumption that term structure is upward sloping or downward sloping?

[@niraj6254]

Thank you very much Sir. You've been a great help !!

[@finRGB]

Glad you found the video helpful, Niraj.

[@Alexander-pk1tu]

awesome video man. Thank you very much

[@shameelshakir8632]

It is very clear, but may I know what is that C in the EE(t) formula. Is it just any constant or anything. There is no explanation with Constant

[@finRGB]

It's a constant i.e. the portion of the EE expression that is independent of t. If the future value of the swap (at a future time t) were to be assumed to be normally distributed with mean zero and standard deviation sigma*(sqrt(t))*(T-t), this constant will turn out to be sigma / sqrt(2pi).