-236-
mean exposure rather than the 80-percent level.79 Duffie and
Parsons, in particular, stated that FNBC should have used for
valuation purposes the mean exposure level generated by its Monte
Carlo simulation model, rather than the maximum exposure at an
80-percent confidence interval. Whereas the G-30 report endorsed
a higher confidence level for risk management purposes, the G-30
report endorsed a mean exposure measure for valuing credit risk.
9. Mirror and Partially Offsetting Swaps
FNBC claimed credit adjustments on mirror swaps. This
overstated the credit adjustment and understated fair market
value.
FNBC claimed credit adjustments on partially offsetting
swaps. This overstated the credit adjustment and understated
fair market value.
10. Per-Swap Adjustments
FNBC computed its credit (and administrative) adjustments
for groups of swaps. O’Brien opined that “Under FNBC’s
procedure, swaps having shorter-than-average lives, relative to
others originated in the same quarter, will have credit deferral
income amortized over a longer term than the life of the swap,
and conversely for swaps having longer-than-average lives.”
79 FNBC’s 80-percent confidence level for a swap’s exposure
at some future time is much larger than the mean exposure for
that same time.
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