Volume 4 — Credit Risk Management © Copyright 2002, CCRO. All rights reserved. Table of Contents I INTRODUCTION..............................................................................................................................1 II CREDIT ALLOCATION AND FINANCIAL RISK ANALYSIS ...................................................4 1.0 Credit Policy ................................................................................................................................4 2.0 Establishing Credit Limits ..........................................................................................................4 3.0 The Cost of Credit .......................................................................................................................8 III CONTRACTS ..................................................................................................................................9 1.0 Contract Uses and Types ............................................................................................................9 2.0 Contract/Credit Provisions...................................................................................................... 10 IV MEASUREMENT ......................................................................................................................... 13 1.0 Credit Exposure ........................................................................................................................ 13 2.0 Distribution of Losses Given Default ...................................................................................... 14 3.0 Credit Value at Risk (CVaR) .................................................................................................... 15 4.0 Implications for Credit Charges, Credit Reserves, and Credit Capital ................................. 15 5.0 Stress Testing and Scenario Analysis ...................................................................................... 16 V MONITORING............................................................................................................................... 17 VI MITIGATION ............................................................................................................................... 21 1.0 Types of Risk Mitigation .......................................................................................................... 21 2.0 Reduction Methods ................................................................................................................... 23 3.0 Transfer Methods ...................................................................................................................... 25 4.0 Multilateral Clearing ................................................................................................................ 25