Can you share how the own credit is calculated on financial instruments issued by the firm and how the changes in own credit is calculated for the change in own credit from date of issuance of the financial instruments to the reporting date (production date).
One way to measure it is
change in own credit = TV (Mt, Ft) - TV (Mt, Fi) [i]
where, TV(Mt,Ft) : theoretical value of the financial instruments using backbone curve on the production date Libor + Own credit spread on the production date
TV(Mt, Fi) : theoretical value of the financial instruments using backbone curve on the production date Libor + Own credit spread on the issuance date.
But, the above approach has limitation in following hypothetical scenarios :
let us assume Own credit curve on the production date and issuance date remain same but it's constituent changes. In that cases, the calculation will not correctly capture the own credit change:
- Production Date Own credit : 5%
Libor : 4%
own credit spread : 1% - issuance Date own credit:5%
libor : 3%
own credit spread :2%
in the above hypothetical scenario, if we put in the equation [i], the issuance date TV will be based on 6% (4% + 2%)
your response and sharing will be highly appreciated.
CAclubindia
