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17.3 the basel iii framework

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Credit risk management

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Example Index Copyright 2018 CapitaLogic Limited Example Description Excel technique 1 Basel I framework 2 Standardized approach 3 Complete static hedge 4 Partial static hedge 5 Dynamic hedge This Excel workbook is prepared in accordance with Chapter 17 of the text book "Managing Credit Risk Under The Basel III Framework, 3rd ed" Authored by :Dr. LAM Yat-fai (林日辉) Principal, Structured Products Analytics, CapitaLogic Limited Adjunct Professor of Finance, City University of Hong Kong Doctor of Business Administration CFA, CAIA, CAMS, FRM, PRM Website: https://sites.google.com/site/crmbase E-mail: crmbasel@gmail.com Copyright 2018 CapitaLogic Limited
Example 1 Basel I framework Debt Principal CCR CC Greece 5-year government bond 100 0.0% 0 Bank of China 6-month short term paper 80 1.6% 1.28 Tencent 3-year loan 60 8.0% 4.8 Residential mortgage, FICO score 650 40 4.0% 1.6 Total capital charge 7.68 Copyright 2018 CapitaLogic Limited
Example 2 Standardized approach Debt Rating EAD CCR CC Greece 5-year government bond CCC 100 12.0% 12 Bank of China 6-month short term paper A 80 4.0% 3.2 Tencent 3-year loan BBB 60 8.0% 4.8 Residential mortgage, FICO score 650 40 2.8% 1.12 Total capital charge 21.12 Copyright 2018 CapitaLogic Limited
Example 3 Complete static hedge Origination Deterioration Unprotected Protected Principal 100 100 0 100 LGD 60% 80% 80% PD 0.3345% 2.5652% 2.5652% RM 3 2 2 EL 0.6 4.05174344 0 Rating A BB A EAD 100 100 100 CCR 4% 8% 4% CC 4 8 4 Debt Protected by CDS Copyright 2018 CapitaLogic Limited
Example 4 Partial static hedge Origination Deterioration Unprotected Protected Total Principal 100 100 14.8084401 85.1915599 LGD 60% 80% 80% PD 0.3345% 2.5652% 2.5652% RM 3 2 2 EL 0.6 4.05174344 0.6 Rating A BB BB A EAD 100 100 14.8084401 85.1915599 CCR 4% 8% 8% 4% CC 4 8 1.18467521 3.4076624 4.5923376 Debt Protected by CDS Copyright 2018 CapitaLogic Limited
Example 5 Dynamic hedge Origination Deterioration Unprotected Protected Total Principal 100 100 9.77833654 90.2216635 LGD 60% 80% 80% PD 0.3345% 2.5652% 2.5652% RM 3 2 2 1-year EL 0.2006704 2.05219359 0.2006704 Rating A BB BB A EAD 100 100 61.3335728 38.6664272 CCR 4% 8% 8% 4% CC 4 8 4.90668582 1.54665709 6.45334291 Debt Protected by CDS Copyright 2018 CapitaLogic Limited

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17.3 the basel iii framework

  • 1. Example Index Copyright 2018 CapitaLogic Limited Example Description Excel technique 1 Basel I framework 2 Standardized approach 3 Complete static hedge 4 Partial static hedge 5 Dynamic hedge This Excel workbook is prepared in accordance with Chapter 17 of the text book "Managing Credit Risk Under The Basel III Framework, 3rd ed" Authored by :Dr. LAM Yat-fai (林日辉) Principal, Structured Products Analytics, CapitaLogic Limited Adjunct Professor of Finance, City University of Hong Kong Doctor of Business Administration CFA, CAIA, CAMS, FRM, PRM Website: https://sites.google.com/site/crmbase E-mail: crmbasel@gmail.com Copyright 2018 CapitaLogic Limited
  • 2. Example 1 Basel I framework Debt Principal CCR CC Greece 5-year government bond 100 0.0% 0 Bank of China 6-month short term paper 80 1.6% 1.28 Tencent 3-year loan 60 8.0% 4.8 Residential mortgage, FICO score 650 40 4.0% 1.6 Total capital charge 7.68 Copyright 2018 CapitaLogic Limited
  • 3. Example 2 Standardized approach Debt Rating EAD CCR CC Greece 5-year government bond CCC 100 12.0% 12 Bank of China 6-month short term paper A 80 4.0% 3.2 Tencent 3-year loan BBB 60 8.0% 4.8 Residential mortgage, FICO score 650 40 2.8% 1.12 Total capital charge 21.12 Copyright 2018 CapitaLogic Limited
  • 4. Example 3 Complete static hedge Origination Deterioration Unprotected Protected Principal 100 100 0 100 LGD 60% 80% 80% PD 0.3345% 2.5652% 2.5652% RM 3 2 2 EL 0.6 4.05174344 0 Rating A BB A EAD 100 100 100 CCR 4% 8% 4% CC 4 8 4 Debt Protected by CDS Copyright 2018 CapitaLogic Limited
  • 5. Example 4 Partial static hedge Origination Deterioration Unprotected Protected Total Principal 100 100 14.8084401 85.1915599 LGD 60% 80% 80% PD 0.3345% 2.5652% 2.5652% RM 3 2 2 EL 0.6 4.05174344 0.6 Rating A BB BB A EAD 100 100 14.8084401 85.1915599 CCR 4% 8% 8% 4% CC 4 8 1.18467521 3.4076624 4.5923376 Debt Protected by CDS Copyright 2018 CapitaLogic Limited
  • 6. Example 5 Dynamic hedge Origination Deterioration Unprotected Protected Total Principal 100 100 9.77833654 90.2216635 LGD 60% 80% 80% PD 0.3345% 2.5652% 2.5652% RM 3 2 2 1-year EL 0.2006704 2.05219359 0.2006704 Rating A BB BB A EAD 100 100 61.3335728 38.6664272 CCR 4% 8% 8% 4% CC 4 8 4.90668582 1.54665709 6.45334291 Debt Protected by CDS Copyright 2018 CapitaLogic Limited