Country Sovereign Event Risk Setup
Country Sovereign Event Risk covers both Country Exposures (Country Wrong way Exposure) and Country Losses (Country Devaluation Losses)
The Country Sovereign Event Risk was initially designed to cover Devaluation and Default. It has now become a general framework to model precisely what can happen to your positions when a country is subject to any type of event that can affect the value of it's currency and thus impact your exposure(s)
Country Sovereign Risk is a subtle measure of exposures and losses. Indeed, Country Sovereign Event Risk combines the probability of an an event with the impact it will have if it indeed occurs.
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The impact is the Country Growth/Contraction-Devaluation rate associated with the Country.
This rate is defined as the percent per annum that this event will have on the country's currency rate. - The probability of occurrence of this specific Event.
This probability is taken from the Credit Default Event Curve that has been associated to the Country through the Rating Rank.
To get useful results, you must ensure:
- Counterparties are defined with their respective countries.
- Accounts have been configured with appropriate Collateral and Netting schemes
The nice thing about Country Risk is that it is a byproduct of Credit
Risk.
Once you have configured the engine for Credit risk, you can start measuring Country
Sovereign Event Risk provided you have defined.
- Country Rating
- Country Growth / Contraction
- Country Limits (Optional)
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 indeed filter all your Credit Exposures according to their respective locations.
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 using the Copula Time-To-Default Engine, a Correlation Matrix between countries will be required.
Country Exposure and Credit Exposures
For each account that belongs to a given counterparty domiciled in a given country, Risksvr™ computes the Country Exposure by applying a Growth/Contraction-Devaluation Rate to the Account's Credit Exposure. see Risksvr™ Exposure Calculations)This exposure can be measured on an overall basis or against a predefined limit.
If you assigned a country limit, then the Excess will be displayed as the difference between the limit assigned and the total exposures in that country.
Sovereign Risk and the Credit Default curve
To measure sovereign event risk we take the Rating Rank you assigned to the country and use it as an index into a credit curve lookup table. This credit curve is then broken down into daily forward default / no-default probabilities. Every daily probability is then compounded to match every simulation horizon.The Copula Survival approach follows a slightly different methodology. Instead of using daily forward default / no-default arithmetic, we use hazards that are cumulated to compute the probability at a given point in time.