Overview

A counterparty claim is created by future replacement value, not by today's notional. Before calculating a price adjustment, a quant must know who owes whom, what can still be owed when default occurs, and which default ends the contract. This topic establishes that event and exposure ledger.

By the end of this note you should be able to:

• convert signed values into positive and negative exposure;
• calculate means and quantiles of future exposure scenarios;
• distinguish investor, counterparty and reference defaults;
• select the correct first-default close-out cash flow.

1. Contents
2. The big picture