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 
