The Financial Crisis Of The Usa

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1. Introduction In 2007-2008, most firms and individuals experienced a worst financial crisis in the recent 80 years. The crisis first started at the USA then extended to the whole world and it spreads from the financial markets to the real economy rapidly. During this financial disaster, Unfortunately, some financial institutions such as Lehman Brothers, WorldCom and General Motors did not overcome the negative impacts unfortunately, covering almost all major industrials who have a significant effect to the global financial markets. The main source of the crisis is precisely from investment banks, who lent money to individuals according to the value of collateral like investment properties. However, with the movements of market price,…show more content…
Most principal aspects of counter-party credit risk such as risk classifications, risk measurements will be discussed in the following chapters. Since financial risk management is playing an indispensable role in recent years, how to balance between the expected loss and potential return is a commonly concerned topic in financial institutions. Meanwhile, some portfolio models, related simulation methods as well as the methodology of coding EE, PFE, CVA and RC will be introduced later. 2. Counter-party credit risk This type of risk is known as default risk between two or more counter-parties. Though it is one risk type and it may occur together with other dangers such as market risk, liquidity risk and liquidation risk. It can be seen that each one type of these risks may change the positions of counter-parties, which will give rise to the result that a firm or individual cannot afford the contractual debt. Recently, counter-party credit risk is regarded as one main financial risk due to a sequence of the failures of some global firms in 2007-2008 such as Lehman Brothers, Washington Mutual and Enron. In general, the size and the scale of counter-party can be considered as a protective barrier of credit risk, but these cases above contradict the point of view. 2.1 Introduction of counter-party credit risk 2.1.1 Origins of counter-party credit risk All companies will generate great exposure to banks
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