Chapter 3 - Managing Credit Risk

Question 1

What are the 5 ways to reduce counterparty risk

Answer 1

1. If contracts are managed through an exchange they might require the parties to post a margin
2. Though the use of collateral
3. Clearing house can be used (same as exchange)
4. Banks can use a master netting agreement (only net loser pays the net winner)
5. Use of credit derivatives

Question 2

What are the 7 headings for determining credit worthiness

Answer 2

Suitability of loan structure

Affordability

Viability

Security

Financial stability

Capital structure

Track record of management

Question 3

What are the 6 ways banks can use forbearance

Answer 3

Lengthening the term of the loan

Temporary payment memorandum

Conversion of a loan to interest only

Reduction in the interest rate

Debt- to - equity swaps

Covenant waivers