Digging deep into derivatives: trying to make life easier – techniques for measuring derivative credit exposure

The widespread use of derivatives in asset and liability management raises the issue of appropriate measurement of credit exposure. However, nearly all industry literature focuses on the needs of the most sophisticated dealers, which presents a problem for those users who want to improve the measurement of derivative credit exposure, but are unable to commercially justify the expense of cutting edge techniques. This article attempts to fill this gap by examining the range of pragmatic approaches available, together with their key pros and cons.