PFE for IRS using HJM
About the course
The course consists of two EXCEL files that demonstrate the calculation of Potential Future Exposure (PFE) for a fixed-for-floating non-amortizing Interest Rate Swap (IRS), one for a PKR denominated instrument, the other for a USD denominated swap. The model uses the Heath Jarrow Merton (HJM) interest rate model to value the IRS at each leg over its lifetime and simulate a distribution of PFEs across 1000 runs that can be used to assess counterparty default risk and set PFE limits.
After taking this course you will be able to:
- Bootstrap zero & forward rate curves
- Conduct a principle component analysis on the forward rates
- Build an HJM interest rate model
- Price a fixed for floating interest rate swap over its lifetime
- Determine the potential future exposure of the IRS
- Simulate PFE and plot a histogram of the results
- Calculate worst case PFE
- Assess the confidence levels & credit conversion factors for an associate level of risk
Comfortable with basic mathematics and EXCEL (in particular the use of data table & Solver) and some familiarity with derivative pricing.
The course is aimed primarily at banking professionals and individuals responsible for risk management within banks.
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