Sean Hsu, FRM, is a risk analyst for a large financial institution. In a presentation on credit risk to the firm’s risk committee, Hsu identifies the following four steps for valuing one-sided derivative credit risk:
- Calculate the risk-neutral expected exposure for each period.
- Compute the risk-neutral default loss rate for each period.
- Make a credit valuation adjustment in derivative payments to reflect changes in credit risk.
- Determine the value of credit risk for each period.
Which of the four steps identified by Hsu is NOT one of the steps in valuing one-sided credit risk?
A. Step 3.
B. Step 4.
C. Step 1.
D. Step 2.
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