A Practitioner Path from Counterparty Credit Risk to Quantitative Modelling
Maturity LevelL1Market Models
What Is CCR?
CCR (Counterparty Credit Risk) is the risk that a counterparty to a transaction, such as a derivative or repurchase agreement, defaults before the final settlement of the trade's cash flows.
Phase 1 • 4-6 Weeks
Market Models
Understand market models, credit dynamics and calibration choices.
What You Learn
Interest rate models
FX and equity models
Credit spread models
Correlation and multi-factor models
Calibration to market data
Key Concepts / Tools
Hull-White and Libor Market Model
Geometric Brownian Motion
Hazard rates
Mean reversion
Real-world vs risk-neutral calibration
Phase 2 • 4-6 Weeks
Monte Carlo Simulation
Build a robust simulation engine for future exposure analysis.
What You Learn
Monte Carlo simulation
Stochastic processes
Path generation techniques
Variance reduction
Key Concepts / Tools
Time discretisation and Euler schemes
Cholesky decomposition
Antithetic variates
Quasi-Monte Carlo
Importance sampling
Phase 3 • 3-4 Weeks
Portfolio Pricing
Revalue a derivatives portfolio consistently along simulated paths.
What You Learn
Pricing of swaps, FX and options
Cashflow projection
Portfolio revaluation
Key Concepts / Tools
Risk-neutral valuation
Cashflow discounting and curve usage
Black-Scholes model
Volatility surfaces
Phase 4 • 2-3 Weeks
Exposure Analytics
Turn portfolio values into EE, EPE and PFE exposure profiles.
What You Learn
Positive exposure calculation
EE, EPE and PFE computation
Netting effect
Exposure aggregation
Key Concepts / Tools
V+(t) = max(V(t), 0)
EE(t) = E[V+(t)]
EPE = T-1 ∫0T EE(t) dt
PFEα(t) = Qα(V+(t))
Phase 5 • 2-3 Weeks
Backtesting & Validation
Validate credit exposure models and explain exceptions.
What You Learn
Exposure backtesting: EE and PFE
Forecast horizon alignment
Benchmarking and model comparison
Traffic-light and exception reporting
Key Concepts / Tools
Predicted vs realised exposure
EE calibration diagnostics
PFE exception testing
Non-overlapping and overlapping periods
Full distribution tests: KS, AD
Challenger models and stress tests
Phase 6 • 4-6 Weeks
SA-CCR & IMM
Apply the regulatory framework for counterparty credit risk capital.
What You Learn
Standardised Approach (SA-CCR)
Internal Model Method (IMM)
Capital floor and RWA impact
Key Concepts / Tools
SA-CCR: supervisory delta and add-ons
IMM: effective EPE and alpha (1.4)
Effective maturity derived from EE profiles
Vasicek model: PD, LGD and asset correlation
Phase 7 • 6-10 Weeks
WWR & Collateral
Model advanced dependencies, collateral dynamics and initial margin.
What You Learn
Wrong-Way Risk (WWR)
Collateralised exposure dynamics
Initial Margin (SIMM) modelling
Key Concepts / Tools
Specific WWR
Copula-based correlation
MPOR, thresholds and MTA
Future initial margin through stochastic SIMM simulation
Phase Output (Proof of Competence)
Calibration Window Sensitivity
Compare calibration windows for GBM parameters under the P-measure
Explain recent, Basel and stress lookback choices
Lookback
P-Drift (μ)
P-Vol (σ)
CCR Observation
1-Year
+2.15%
8.20%
Momentum; biased drift
3-Year
-0.45%
9.75%
Balanced; standard
10-Year
-0.08%
11.30%
Vol expansion
Zero-Drift
0.00%
-
Martingale benchmark
Monte Carlo Path Generator
Generate correlated risk-factor paths for exposure simulation
Document discretisation, variance reduction and convergence checks
Scenario Revaluation Engine
Revalue swaps, FX forwards and equity options along simulated paths
Aggregate trade-level values into a portfolio exposure cube
Scenario
Swap MtM
FX Fwd MtM
Eq Option MtM
Portfolio MtM
t0
1.2
0.4
2.1
3.7
Path 1, t1
1.0
0.5
1.9
3.4
Path 1, t2
0.7
0.8
1.8
3.3
EE / PFE Exposure Engine
Produce expected exposure, expected positive exposure and PFE curves
Show the effect of netting and positive-part aggregation
PFE Backtesting & Exceptions Log
Compare predicted PFE with realised exposure over multiple horizons
Classify exceptions and document challenger-model findings
Horizon
Sample
Obs.
Exceptions
Status
1M
Non-overlap.
60
2
Green
3M
Overlapping
58
3
Green
6M
Overlapping
55
5
Amber
1Y
Overlapping
49
4
Review
Capital Requirement Calculator
Compare SA-CCR and IMM exposure-at-default outcomes
Quantify the capital benefit of internal models
Method
EAD
Capital
SA-CCR
$14.2M
$1.13M
IMM
$9.8M
$0.78M
Advanced CCR Sensitivity Suite
Stress independence, general WWR, specific WWR and collateral assumptions
Show the impact of collateral and full initial margin on exposure
Scenario
Model / Method
Impact
Independence
None (ρ=0)
$1.2M base
General WWR
Gaussian (ρ=0.3)
+25%
Specific WWR
Student-t (ν=4)
+140%
+Collateral
10D MPOR path
-35%
+Full IM (SIMM)
Functional approx.
-92%
Successful implementation validates technical readiness for L1.