Overview

Collateral can reduce a net claim, but only if the cash is available at the relevant settlement time. A simulation can erase real residual exposure by updating collateral too late or by using a future realised payoff as a replacement value. This topic makes the chronology explicit and provides a runnable joint exposure/default benchmark.

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

• interpret signed posted and received collateral;
• compute threshold collateral and residual claims;
• explain the no-jump limit in which complete collateral removes credit loss;
• assemble a pathwise exposure and CVA estimator with uncertainty.

1. Contents
2. The big picture