Estimation of Credit Risk Description of the Methodology: The methodology for estimating credit risk would include estimates of both current credit risks and potential additional credit risks. These estimates would be based on the net replacement values, current and projected, respectively, associated with each counterparty. The projections of potential additional credit risk would reflect the effects of adverse market conditions on the firm's exposure to the counterparty, would require the revaluation of all open positions and would be based on the models described in the discussion on evaluation of risk in relation to capital. Additionally, the computations would take into account enforceable netting agreements and collateral held.
Both current and potential additional credit risks would be weighted on the basis of the rating agencies' published probability of default statistics relevant to the maturity of the underlying contracts, based on the same maturity assumptions to be used in the calculation of current credit risk (but in no event would a probability below 0.001 be used). As a practical matter, the projections of potential additional credit risks would be based upon a single maturity assumption for each type of underlying instrument (e.g., all interest rate swaps would be assumed to mature in five years). Illustration of the Methodology: COUNTERPARTY INFORMATION
| | Current Net Replacement Values |
| Credit Rating | Swaps | F/X Forwards |
Class | AA | 0.0 | 0.0 |
Class | A | 520.0 | 65.0 |
Class | BBB | 8.0 | 0.0 |
| | Projected Net Replacement Values |
| Credit Rating | Swaps | F/X Forwards |
Class | AA | 12.0 | 3.0 |
Class | A | 2,020.0 | 130.0 |
Class | BBB | 18.0 | 1.0 |
| | Additional Projected Net Replacement Values |
| Credit Rating | Swaps | F/X Forwards |
Class | AA | 12.0 | 3.0 |
Class | A | 1,500.0 | 65.0 |
Class | BBB | 10.0 | 1.0 |
ESTIMATED CURRENT EXPOSURE
| Net Replacement Value | Default Ratio | Estimated Current Exposure |
Class AA | | | |
Swaps | 0.0 | .001 | .000 |
F/X Forwards | 0.0 | .001 | .000 |
Class A | | | |
Swaps | 520.0 | .006 | 3.120 |
F/X Forwards | 65.0 | .001 | .065 |
Class BBB | | | |
Swaps | 8.0 | .020 | .160 |
F/X Forwards | 0.0 | .002 | .000 |
Total Estimated Current Exposure | | | 3.345 |
ESTIMATED POTENTIAL ADDITIONAL EXPOSURE
| Additional Projected Net Replacement Value | Default Ratio | Estimated Potential Additional Exposure |
Class AA | | | |
Swaps | 12.0 | .001 | .012 |
F/X Forwards | 3.0 | .001 | .003 |
Class A | | | |
Swaps | 1,500.0 | .006 | 9.000 |
F/X Forwards | 65.0 | .001 | .065 |
Class BBB | | | |
Swaps | 10.0 | .020 | .200 |
F/X Forwards | 1.0 | .002 | .002 |
Total Estimated Potential Additional Exposure | | |
9.282 |
Total Estimated Current Exposure | | | 3.345 |
Total Credit Exposure | | | 12.627 |
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