Bridging the gap risk reloaded: modelling wrong-way risk and leverage
A model extends the counterparty risk calculation to include nonlinear and complex portfolios
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In this article, Fabrizio Anfuso extends the model for wrong-way risk and leveraged exposures introduced in a previous publication to nonlinear payoffs and mixed portfolio compositions. For the generalised model, he develops both an analytical framework that includes a method for embedding wrong-way risk dynamics within existing Monte Carlo counterparty credit risk implementations and a closed-form expression for the exposure at default in the presence of leverage
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