A large bank has a small number of highly valuable counterparties who are resource producers. These counterparties while marginal credits by bank standards are nonetheless highly profitable. They are constantly resetting hedges and using highly leveraged products to manage their exposures to volatile asset and currency prices.

The bank used a spreadsheet based Monte Carlo system to perform credit assessment on new deals. Unfortunately, this approach ignored the fact the new trades were linked by documentation and did not account for the portfolio effect of the simultaneous closing out the related hedge positions.

Moreover, in spite of the fact that these counterparties were domiciled in one jurisdiction they had large portfolios consisting of both vanilla and complex transactions. In many instances their portfolios were well hedged with close-out netting arrangements that reduced their actual portfolio exposure to less than 30% of the aggregate measures they were using.