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Measuring and dynamically hedging the economic value of a derivative portfolio for counterparty credit risk

Date: 01-25-2005
Start Time: 6:00pm
End Time: 7:30pm
Speaker: Evan Picoult, Managing Director, Citigroup
Location: 412 Shapiro CEPSR, Davis Auditorium

ABSTRACT

An increasing number of banks have begun to dynamically manage the counterparty credit risk of their portfolio of derivative transactions. Like general loan portfolio credit risk, counterparty credit can be measured from a narrow default-only perspective or a broader economic value perspective. The economic value of a portfolio of derivatives can be expressed as the difference between a risk free value and the credit value adjustment (CVA) of the portfolio. The CVA is the reduction in the risk free value of the portfolio due to the counterparty credit risk. Actively hedging counterparty credit risk is thereby transformed into actively hedging the CVA of the portfolio. This presentation reviews the measurement of potential counterparty exposure, and explains recent research into the appropriate loan equivalent for counterparty risk, the measurement and hedging of the CVA and the definition of the effective counterparty spread duration of a portfolio of derivatives.

BIO

Evan Picoult is a Managing Director within Citigroup's Risk Architecture Department. Over the last few years he has focused on Citigroup-wide projects regarding Basel II and the enhancement of the measurement, implementation and use of Economic Capital.

Evan joined Citibank in 1980 in systems development, transferred to a trading desk in 1986 and has worked in internal risk management since 1988. He has led the development of the methods used at Citigroup for measuring market risk and counterparty credit risk. He is a frequent lecturer on risk topics at professional conferences, regulatory conferences and at universities and has published a number of articles on risk topics.

Evan is on the Editorial Board of the Journal of Credit Risk. He is on the Board of Directors of the IACPM (International Association of Credit Portfolio Managers). He is also on the Advisory Board of the IAFE (International Association of Financial Engineers) and is on the Advisory Board of Carnegie-Mellon University's Master of Science in Quantitative Finance program. He has been the North American co-chair of ISDA's Risk Management Committee since the mid-1990's. He has also actively served on several industry associations' working groups on Basel II.

Evan has multi-departmental ties to Columbia University. He has a Ph.D. in experimental particle physicsfrom the Columbia's Physics Department, did post-doctoral research on visual perception and taught in Columbia's Psychology Department, and after joining Citibank returned to Columbia part time, in its Executive MBA program, to obtain an MBA in finance from its Graduate School of Business.

PRESENTATION