Counterparty Risk Subject to Additional Termination Event Clauses

Journal of Credit Risk, Volume 9, number 1, Spring 2013 (39-73)

36 Pages Posted: 6 Oct 2013

Date Written: October 1, 2013

Abstract

The credit additional termination event (ATE) clause is a counterparty risk mitigant that allows banks to terminate and close out bilateral derivative contracts if the credit rating of the counterparty falls below the trigger level. Since credit default is often preceded by rating downgrade, credit ATE can significantly reduce the counterparty credit risk by preemptively terminating the counterparty exposure.

However, there is still the risk that the counterparty may default without going through a severe downgrade. This paper presents a highly practical method for valuating bilateral credit value adjustment in the presence of an ATE trigger.

Suggested Citation

Zhou, Richard, Counterparty Risk Subject to Additional Termination Event Clauses (October 1, 2013). Journal of Credit Risk, Volume 9, number 1, Spring 2013 (39-73), Available at SSRN: https://ssrn.com/abstract=2334430
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