The credit crisis and ongoing European sovereign debt crisis have shown the importance of the proper assessment and management of counterparty risk. IIT Professor of Applied Mathematics Tomasz R. Bielecki, along with Stéphane Crépey and Damiano Brigo, addresses these issues  in the book “Counterparty Risk and Funding: A Tale of Two Puzzles,”  and also explores the particularly challenging issue of counterparty risk in portfolio credit modeling.

The book, which is set to be published on June 17, 2014, targets researchers and graduate students in financial mathematics, financial quants, managers in banks, CVA desks, and members of supervisory bodies. In six parts, it touches on today’s financial landscape, including the current multi-curve reality of financial markets; the basic elements of the pricing and hedging framework; a reduced-form modeling approach in which the risk of default of the two parties only shows up through their default intensities; counterparty risk on credit derivatives through dynamic copula models; a credit migrations model that allows you to account for rating-dependent credit support annex (CSA) clauses; and classical tools from stochastic analysis.

Regarding the book, Mark Davis from Imperial College London, said: “The landscape of the rates and credit markets has changed so drastically since the 2008 crisis that older textbooks are barely relevant and, from an analytic perspective, appropriate methods have to be rethought from scratch. The present volume is one of the best contributions in this direction, featuring a clear description of the various ‘value adjustments,’ new models for portfolio credit risk, a unified analytic framework based on BSDEs, and detailed treatment of numerical methods.”