Replace Calculations from the Collateral Agreement and eSign it in minutes

Aug 6th, 2022
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How to Replace Calculations from the Collateral Agreement

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This week, Ive been looking at the case of Coleman v Mundell, which was handed down at the end of last month. The case was a dispute about an oral contract. The claimant, Mr C sought specific performance of the contract, which is an order compelling a party to comply with their contractual obligations. It is an equitable remedy and so it is only available at the courts discretion. The facts of this case may be summarised as follows. Mr C, the claimant, had a company which was suffering financial difficulties and he wanted to secure a cash injection into his business. He owned shares in a Spanish entity. The defendant Mr M was Mr Cs friend and also a businessman. Mr C and Mr M had a conversation on the 30th of September 2016. Mr C and Mr M each recalled that conversation differently. At trial, Mr C said that Mr M agreed to make an interest-free loan of 250,000 and that the loan would be secured on Mr Cs shares. Mr M recalled that Mr C had said that M

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Replacement Cost captures the loss that would occur if a counterparty were to default and was closed out of its transactions immediately.
Replacement Cost (RC) C is the haircut value of net collateral held, where the haircut reflects the potential change in value of non-cash collateral over a 1-year time period.
EAD = (RC + PFE), where RC stands for Replacement Cost, PFE for Potential Future Exposure and the constant is set to 1.4. The replacement cost is a measure of the current netting set value (sum of all of the trades PV), taking into account potential collateral exchange, and is floored at zero.
Under the CEM, the EAD is calculated as the sum of the current market value of the instrument and a potential future exposure (PFE) add-on component that reflects the potential change in the instruments market value between the computation date and a future date on which the contract is replaced or closed out in the
The EAD is calculated based upon the Replacement Cost (RC) and the Potential Future Exposure (PFE) taking into account the volatility of the net derivative exposure: EAD = 1.4 x (RC + PFE).
Under the current exposure method, a financial institutions total exposure is equal to the replacement cost of all marked-to-market contracts plus an add-on that is meant to reflect the potential future exposure (PFE).
Under the current exposure method, a financial institutions total exposure is equal to the replacement cost of all marked-to-market contracts plus an add-on that is meant to reflect the potential future exposure (PFE).
The current fair value of a derivatives contract, representing the amount that would need to be paid to replace the contract now, in the event of the failure of the derivative counterparty.

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