Country Sovereign Risk Setup
Country or Sovereign Event Risk extends
Country Exposures to include the probabilities
of Sovereign Events by coupling each Country's
Rating Rank to a Country Event-Curve (i.e. a Credit-Curve relating to countries).
Each
Country's Probability weighted Exposure can then be compared against
pre-defined country limits or form a country loss statistic that will be aggregated
to other measures of risk to assess equity buffer capital, etc.
To get valid results you must ensure the following terms and
conditions are available for the engine to pick up:
- Counterparties are defined with their respective countries.
If you are using an Interface to bridge Parties, ISDA Master Agreement or Account information coming from another repository, you can actually assign different countries to accounts that belong to the same party. - Counterparty Accounts are properly defined with appropriate Collateral, Home-Office Collateral and Close-Out Netting rules.
Once basic Credit Terms and Conditions are defined, you will need to ensure the following Country definitions are available:
- Country Rating Ranks that are used to reference a Credit-Curve / Country-Default-curve.
- Country Impact - (also called Country Revaluation or Devaluation). This is the impact your exposure will be submitted to when the event takes place and the Country's foreign exchange is devalued or revalued.
- Limits you want to assign to specific Countries in order to measure any Excess.
Setup Remark
We can only recommend you model your risk as precisely as time permits, but you can already get a good idea of your country exposures with a country growth (re-valuation/devaluation) rate of zero.
A value of zero will simply aggregate Counterparty Account Exposures according to country, provided they are not considered local due to the terms and conditions defined in the analysis.
We can only recommend you model your risk as precisely as time permits, but you can already get a good idea of your country exposures with a country growth (re-valuation/devaluation) rate of zero.
A value of zero will simply aggregate Counterparty Account Exposures according to country, provided they are not considered local due to the terms and conditions defined in the analysis.
Other important sources of Data
Depending on how you configure Country Sovereign Event Risk, These two sources of data might be required.
- A Credit Default Curve and associated Rating System or Rank
Identifier has been defined.
Note: If you do not define a specific Credit Curve and associated Rating System the engine will take the active Rating system and Credit Curve used for Counterparties
- If you are computing Correlated Country Risk, a Correlation Matrix between
countries will be required.
Note: If you are computing multivariate country risk and you do not supply a specific country correlation matrix, the engine will try to source the correlations from Equity Primary Market Indices and alternatively currencies as a fallback DataSource.
Country Impact : Revaluation / Devaluation
Country Revaluation / Devaluation sets the assumed impact on the country's currency.
Country Revaluation / Devaluation is Expressed in Percent and annual terms.
- A negative value defines the average devaluation or contraction of the country's exposure.
-
A
positive value defines the annual expansion or growth pattern on the country's exposure.
Screen Input Format:
Both percent and absolute values are supported by the interface.
Values larger [smaller] than 1 [-1] are converted to decimal fractions.
Values above [below] 100 [-100] are considered erroneous and are reset to 0.
Values in the range [-1 . 1] are not converted. They are considered absolute values.
Both percent and absolute values are supported by the interface.
- The Minimum value is -100%
- The Maximum value is 100%
Values larger [smaller] than 1 [-1] are converted to decimal fractions.
Values above [below] 100 [-100] are considered erroneous and are reset to 0.
Values in the range [-1 . 1] are not converted. They are considered absolute values.
Engine Internal Format: The
Revaluation / Devaluation value is Real Decimal. For example, a value of 0.1 is read as ten percent.
Values above [below] 1 [-1] are rejected and the value is reset to 0.
Values above [below] 1 [-1] are rejected and the value is reset to 0.
Country Limit
The Limit field sets an accepted Country Exposure Limit for each country. This limit is used to Compute Country Excess Exposure. of all parties that are domiciled in the country.Screen Input Format:
The Limit is defined as an absolute Monetary Amount in the analysis base currency.
- The Minimum value is 0
- The Maximum value is 10^14.
Behavior:
- Values lower than 0 disable the limit calculation altogether.
- A Value of 0 assigns the entire exposure to excess.
Engine Internal Format:
-
A negative value disables the limit for the country.
- A positive absolute value defines the maximum exposure acceptable in the local base currency.
Country Rating
The Country Rating Rank is used to associate the country with a term structure of probabilities.
- The Rating System and associated event probabilities is generic, you can define any type of Rating Rank System and associated Credit Event Curve.
-
To simplify setup the Rating Rank System is usually taken from the default
engine internal rating rank system.
You can however associate any number of rating ranks you deem fit.
The Credit event curve is often assimilated to Counterparty Credit [Default] Curves. -
If you do not define a credit curve, the
engine will use the same credit default curve used to compute Defaults.
Screen Input Format:
The Rating associated to the country is defined from a list of Ratings that belong to the countries active Rating System.
Countries are assigned a AAA Rating Rank by default (if the default Rating system is defined).
The Rating associated to the country is defined from a list of Ratings that belong to the countries active Rating System.
Countries are assigned a AAA Rating Rank by default (if the default Rating system is defined).
Engine Internal Format:
The Rating Rank is an integer index Value from 1 to N where N is the maximum number of
rows defined in the Credit Curve Matrix.
The Minimum rank value is 1 and refers to the first row of the Credit Curve Matrix.
The Maximum rank value is n and refers to the last row of the Credit Curve Matrix.
Credit curve Matrices are usually defined from lowest probability of occurrence of the event to highest probability of occurrence.
A Rating Rank of n defines the Lowest credit standing in the Rating System, whereas a Rating Rank of 1 Defines the Highest Rating Quality.
If Rating Ranks are supplied as strings, the engine will assume Credit Curves are defined individually with a name, type, timeline and rates.
The Minimum rank value is 1 and refers to the first row of the Credit Curve Matrix.
The Maximum rank value is n and refers to the last row of the Credit Curve Matrix.
Credit curve Matrices are usually defined from lowest probability of occurrence of the event to highest probability of occurrence.
A Rating Rank of n defines the Lowest credit standing in the Rating System, whereas a Rating Rank of 1 Defines the Highest Rating Quality.
If Rating Ranks are supplied as strings, the engine will assume Credit Curves are defined individually with a name, type, timeline and rates.
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