Counterparty Credit Risk Simulation Methodology

Counterparty credit risk (CCR) is the risk of loss that will be incurred in the event of default by a counterparty. It will be incurred in the event of default by a counterparty. Only over-the-counter (OTC) derivatives and financial security transactions (e.g., repo) are subject to counterparty risk. If one party of a contract defaults, the non-defaulting party will find a similar contract with another counterparty in the market to replace the default one. That is why counterparty credit risk sometimes is referred as replacement risk. The replacement risk is the MTM value of a counterparty portfolio at the time of the counterparty default.