The Research Of Credit Risk Management Base On Add-on Calculation

In the past 20 years, the rise and development of financial derivatives market become one of the most prominent changes in the international financial markets. Currently, financial derivatives have been an important tool of risk management, and become an integral part in capital markets. In domestic and international financial derivatives markets, the number of interest rate swap transactions increased year after year, becoming the main varieties of OTC. Financial institutions and enterprises have an increasingly strong demand for interest rate derivatives products to hedge interest rate risk. Widely used, it also brings a lot of risk, credit risk is the most talked about. As investors, how to effectively manage credit risk is increasingly important issue.Firstly, we reviewed and summarized the development and research on the credit risk management. Analyzed the advantages and disadvantages over the major risk measurement methodologies. Secondly, based on the literature review, this article discusses the development history and future trends of financial derivatives. By analyzing the transaction data in the exchange and OTC market, illustrated the market position and development trends of the interest rate swap. Further more, this article described the concept of the interest rate swap in detail, introduced the standard interest rate swap and non-standard interest rate swap produce, briefly described the application of interest rate swap in the financial market and four types of risk which is produced during the transaction. And then, we analyzed the impact of various risk factors. Thirdly, the concept of credit risk was outlined. We analyzed the causes and characteristics of credit risk, discussed the credit risk measurement methods. As the credit exposure calculation is the focus of this study, this article represented the concept of the credit exposure and discussed the add-on calculator methodology, compared the add-on calculation and Monte Carlo simulation, analyzed the advantages of the add-on calculation. Finally, this article conduct the case study based on the interest rate swap transaction in the foreign financial institutions, explained how to use the add-on calculation to measure the credit exposure in practice.This article drew on the credit risk measurement and management method in international financial institutions, introduced the current international advanced credit exposure calculation method, and illustrated how to make an additional factor calculation method used in the actual business.This article concluded that the process of the add-on calculation is simpler than the simulation approach, such as, Monte Carlo simulation. Since the add-on calculation doesn't depends on any mathematical models, the rage of applicability is very wide and the duration of development is short, it is able to adapt the rapid development of the derivatives markets...