In the realm of financial markets, risk management is vital to ensure stability and confidence among participants. One essential method for assessing and managing risk is stress testing, particularly when determining the size of the Contributory Guarantee Fund (CGF).
The stress testing framework is based on the following key assumptions:
- Stress Price Determination: The highest net obligation day is considered the stress price, representing the peak exposure in a crisis scenario.
- Worst-Case Scenario Analysis: To evaluate potential risks, the exposure from the two largest participants in terms of debit amounts (DR) is taken into account.
- Close-Out Period: A three-day close-out period is employed, assuming the liquidation of the full portfolio will take at least three market days. This staggered liquidation approach reflects realistic market conditions.