This chapter describes the current state of CCR management, modeling and validation as of the early 2020s. Beginning with the historical evolution of counter party credit risk measurement and management, it discusses backtesting and stress testing as applicable to counterparty credit risk.

In this chapter, we discuss the ways that credit risk arises, and how it can be modelled and mitigated. First, we consider the various types of contractual forms for loans and other obligations. We then discuss credit derivatives, which are contracts with payoffs that are contingent on credit events. We consider credit risk models based on the three fundamental components: probability of default, proportionate loss given default, and exposure at default. We consider models of default for individual firms, including the role of credit rating agencies, structural models, which are based on the underlying processes causing default, and reduced form models which are more based on the empirical information, with less emphasis on the underlying story. This is followed by a description of portfolio credit risk models, where the joint credit risk of multiple entities is the modelling objective.