Duffee Gregory R., "On Measuring Credit Risks of Derivative Instruments", Journal of Banking & Finance, Vol. 20, No. 5,(June 1996), pp. 805-833.

Abstract: This paper critically reviews current practices for measuring credit risks of derivative instruments. It argues that there are two major problems with the standard measurement approach. First, it uses models of the stochastic behavior of financial variables while ignoring both their inherent oversimplification and the uncertainty in their parameters. Second, it ignores the correlations among exposures on derivative instruments and the probabilities of counterparty default. This paper demonstrates that these practices can produce large errors in the estimation of distributions of both future credit exposures and future credit losses.

JEL Classification: G13, G21, G28.

Keywords: Derivatives, Swaps, Credit risk, Risk management.

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