Risksvr™ simulates failure-to-pay and bankruptcy according to three methodologies:

• Default Mode: Either Univariate or Correlated. 
• Markov chain. Either Univariate or Correlated.
• Copula Time-to-Default: Correlated.

  Once failure to pay has been observed at a given point in time (be it failure-to-pay, moratorium, restructuring,  default or reorganization) the value is sliced and diced in order to compute the Loss Given Default (LGD) probability density function of the trade, account, obligor or party.

There are many schools of thought as to what really makes the forward loss

• The value can be computed from full revaluation.
  In this case, the value can be defined:
  • From the the instrument's forward fair value at the time of default
  • From Mean Average value up to the simulation horizon when the party defaulted.

  This option is available to users who believe the "fair" value might understate the loss incurred when they occur 
  near the end of the simulation horizon.  
  

• The value can be computed from a series of user defined Add-On Rules and Factors.

  Then for each account, all receivable and payable amounts are summed by rating category.

If the cumulated account position value is positive and the account 
can be netted then the portfolio is given a value of zero.
 
If the Account cannot be netted, the value of all receivable transactions are set to zero. 
the loss is then computed as the value of the portfolio if it is positive and can be netted or the cumulated receivables if it cannot be netted.

  If Recovery Rates are active, ( either static or stochastic), the loss will be net of recovery i.e.(1- Recovery Rate) 
Which will always  be less conservative than if no recovery is applied. 

This is why Recovery Rates can be tweaked in the analysis setup page. You can indeed set No Recovery. Simple Recovery mean or Stochastic Recovery. (mean and vol).

This is due to the fact that recovering an amount on the lost capital which we are seeking to compute will 
be reduced by the recovery amount (if static recoveries are selected) or the mean +/- the mean volatility times the random draw
(if stochastic recoveries are selected ) .

  Once you have obtained the measure of your loss, you can decide to either discount it back to today's value or keep it as a forward value.
This setting is specified in the Analysis Setup screen. By default the engine assumes Forward Values are used since a Present Value will diminish the Loss and thus reduce Credit Ris.    

  Once all these computations have been performed, the simulation engine aggregates position values and accumulates
the four key statistics (mean, variance, skew and kurtosis), computes any dependant factor, buckets the distribution of returns into  quantiles (or only the tail if requested)  and then proceeds to the next node in time. 

 

 

 

Unexpected Losses (UL) are then computed as:

 with asset Value V_H at horizon H

  Risksvr™ can either assume Forward Values or Net Present Values are Used.

This setting is specified in the Analysis Setup screen.

By default the engine assumes Forward Values as Present Value diminishes the Loss and thus reduce Credit Risk, which is obviously not Conservative.    

 

 

 

Required Capital can then calculated  either as the Present Value or Forward Value (i.e. the Discount Factor becomes 1) of the Losses Given Default or the Loss found in the left hand tail of the Portfolio's Losses Given Default Probability distribution.   

  Equity buffer capital can also be complemented with Operational Risk, Market, Liquidity Risk and Country Risk either from marginals (Copula) or Sum of Variance.