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#6188
Anonymous
Inactive

Hi Roland,

ORE is using the methodology outlined in “Modern Derivatives Pricing and Credit Exposure Analysis” by Lichters, Stamm and Gallagher. In this the FBA and FCA labels are different to Gregory (in effect they are swapped), this is reflected in the code.

The assumption here is that FBA and FCA is applied to an already collateralised trade, in that case an increase in EPE would mean that the exposure to your counterparty has increased, thus they must post more margin to you and thus you get a benefit, so an EPE increase leads to an FBA increase. Equally an ENE increase leads to an FCA increase. This is covered in Appendix A.5 of the user guide.

Gregory on the other hand is considering an un-collateralised trade and considering the FBA and FCA on a collateralised hedging trade, this is why it appears the two labels are reversed.

I agree it appears a bit confusing and is probably not documented as well as it could be, what do you think would be good here? more comments in the code or a longer explanation in the user guide?

Regards,
Niall.