Modelling Single-name and Multi-name Credit Derivatives

Over the past decade, credit derivatives have emerged as the key financial innovation in global capital markets. At end 2004, the market size hit $6.4 billion (in notional amounts) from virtually nothing in 1995. This rise has been spurred by the imperative for banks to better manage their risks, not least credit risks, and the appetite shown by institutional investors and hedge funds for innovative, high yielding structured investment products. As a result, growth in collateralized debt obligations and other second-generation products, such as credit indices, is currently phenomenal. It is enabled by the standardization and increased liquidity in credit default swaps – the building block of the credit derivatives market. Written by market practitioners and specialists, this book covers the fundamentals of the credit derivatives and structured credit market, including in-depth product descriptions, analysis of real transactions, market overview, pricing models, banks business models. It is recommended reading for students in business schools and financial courses, academics, and professionals working in investment and asset management, banking, corporate treasury and the capital markets. Highlights include: Written by market practitioners and specialists with first-hand experience in the credit derivatives and structured credit market A clearly-written, pedagogical book with numerous illustrations Detailed review of real-case transactions A comprehensive historical perspective on market developments including up-to-date analysis of the latest trends

Credit derivatives as a financial tool has been growing exponentially from almost nothing more than seven years ago to approximately US$5 trillion deals completed by end of 2005. This indicates the growing importance of credit derivatives in the financial sector and how widely it is being used these days by banks globally. It is also being increasingly used as a device of synthetic securitisation. This significant market trend underscores the need for a book of such a nature. Kothari, an undisputed expert in credit derivatives, explains the subject matter using easy-to-understand terms, presents it in a logical structure, demystifies the technical jargons and blends them into a cohesive whole. This revised book will also include the following: – New credit derivative definitions – New features of the synthetic CDO market – Case studies of leading transactions of synethetic securitisations – Basle II rules – The Consultative Paper 3 has significantly revised the rules, particularly on synthetic CDOs – Additional inputs on legal issues – New clarifications on accounting for credit derivatives/credit linked notes

The credit derivatives market has developed rapidly over the last ten years and is now well established in the banking community and is increasingly making its presence felt in all areas of finance. This book covers the subject from credit bonds, asset swaps and related ‘real world’ issues such as liquidity, poor data, and credit spreads, to the latest innovations in portfolio products, hedging and risk management techniques. The book concentrates on practical issues and develops an understanding of the products through applications and detailed analysis of the risks and alternative means of trading. Credit Derivatives: Risk Management, Trading and Investing provides: A description of the key products, applications, and an analysis of typical trades including basis trading, hedging, and credit structuring Analysis of the industry standard ‘default and recovery’ and Copula models including many examples, and a description of the models’ shortcomings Tools and techniques for the management of a portfolio or book of credit risks including appropriate and inappropriate methods of correlation risk management A thorough analysis of counterparty risk An intuitive understanding of credit correlation in reality and in the Copula model The CD in the back of this book includes an Evaluation Version of Mathcad® 12 Single User Edition, which is reproduced by permission. This software is a fully-functional trial of Mathcad which will expire 30 days from installation. For technical support or more information see http://www.mathcad.com.

Updated coverage of structured credit products with in-depth coverage of the latest developments Structured credit products are one of today's fastest growing investment and risk management mechanisms, and a focus of innovation and creativity in the capital markets. The building blocks of these products are credit derivatives, which are among the most widely used products in finance. This book offers a succinct and focused description of the main credit derivative instruments, as well as the more complex products such as synthetic collateralized debt obligations. This new edition features updated case studies from Europe and Asia, the latest developments in synthetic structures, the impact of the subprime meltdown, along with models and teaching aids. Moorad Choudhry returns with this excellent update of the credit derivatives market. The second edition of his classic work is, like the subject matter itself, at the forefront of the financial industry. It deserves a wide readership. —Dr Didier Joannas Regional Director, Thomson Reuters, Hong Kong This is the perfect companion for both experienced and entry level professionals working in the structured credit fraternity. It is an erudite, insightful and enjoyable read that successfully demystifies one of the most topical subject areas in banking today, while also providing important practical examples that link the theory to the job itself. —Dr James Berriman Global Pricing Unit, Royal Bank of Scotland Moorad Choudhry has earned a deserved reputation from both academics and practitioners as one of the leading practical yet rigorous authors of finance books. In this Second Edition, his practical knowledge of credit derivatives keeps the audience engaged with straightforward explanations of complicated structures, and an accessible level of mathematical sophistication necessary to understand structured credit products. The author offers complete, rigorous analysis while avoiding overuse of mathematical formulas and carefully balanced practical and theoretical aspects of the subject. I strongly recommend this book for those wishing to gain an intuitive understanding of structured credit products, from practitioners to students of finance! —Mohamoud Barre Dualeh Senior Product Developer, Abu Dhabi Commercial Bank, UAE This is THE book for credit derivative trading. From first steps to advanced trading strategies, this is invaluable. Well written and insightful, perfect for ad hoc reference or reading cover to cover. —Andrew Benson ETF Market Making, KBC Peel Hunt, London Professor Choudhry has inspired me to really get into credit derivatives. It’s great to be lectured by someone with such energy and practical hands-on experience, as well as the ability to get stuck into the details. —George Whicheloe Equity-Linked Technology, Merrill Lynch, London Moorad Choudhry is Head of Treasury at Europe Arab Bank plc in London. He is a Visiting Professor at the Department of Economics at London Metropolitan University.

The credit derivatives industry has come under close scrutiny over the past few years, with the recent financial crisis highlighting the instability of a number of credit structures and throwing the industry into turmoil. What has been made clear by recent events is the necessity for a thorough understanding of credit derivatives by all parties involved in a transaction, especially traders, structurers, quants and investors. Fully revised and updated to take in to account the new products, markets and risk requirements post financial crisis, Credit Derivatives: Trading, Investing and Risk Management, Second Edition, covers the subject from a real world perspective, tackling issues such as liquidity, poor data, and credit spreads, to the latest innovations in portfolio products, hedging and risk management techniques. The book concentrates on practical issues and develops an understanding of the products through applications and detailed analysis of the risks and alternative means of trading. It provides: a description of the key products, applications, and an analysis of typical trades including basis trading, hedging, and credit structuring; analysis of the industry standard 'default and recovery' and Copula models including many examples, and a description of the models' shortcomings; tools and techniques for the management of a portfolio or book of credit risks including appropriate and inappropriate methods of correlation risk management; a thorough analysis of counterparty risk; an intuitive understanding of credit correlation in reality and in the Copula model. The book is thoroughly updated to reflect the changes the industry has seen over the past 5 years, notably with an analysis of the lead up and causes of the credit crisis. It contains 50% new material, which includes copula valuation and hedging, portfolio optimisation, portfolio products and correlation risk management, pricing in illiquid environments, chapters on the evolution of credit management systems, the credit meltdown and new chapters on the implementation and testing of credit derivative models and systems. The book is accompanied by a website which contains tools for credit derivatives valuation and risk management, illustrating the models used in the book and also providing a valuation toolkit.

The credit derivatives market is booming and, for the first time, expanding into the banking sector which previously has had very little exposure to quantitative modeling. This phenomenon has forced a large number of professionals to confront this issue for the first time. Credit Derivatives Pricing Models provides an extremely comprehensive overview of the most current areas in credit risk modeling as applied to the pricing of credit derivatives. As one of the first books to uniquely focus on pricing, this title is also an excellent complement to other books on the application of credit derivatives. Based on proven techniques that have been tested time and again, this comprehensive resource provides readers with the knowledge and guidance to effectively use credit derivatives pricing models. Filled with relevant examples that are applied to real-world pricing problems, Credit Derivatives Pricing Models paves a clear path for a better understanding of this complex issue. Dr. Philipp J. Sch?nbucher is a professor at the Swiss Federal Institute of Technology (ETH), Zurich, and has degrees in mathematics from Oxford University and a PhD in economics from Bonn University. He has taught various training courses organized by ICM and CIFT, and lectured at risk conferences for practitioners on credit derivatives pricing, credit risk modeling, and implementation.

A comprehensive resource providing extensive coverage of the state of the art in credit secruritisations, derivatives, and risk management Credit Securitisations and Derivatives is a one-stop resource presenting the very latest thinking and developments in the field of credit risk. Written by leading thinkers from academia, the industry, and the regulatory environment, the book tackles areas such as business cycles; correlation modelling and interactions between financial markets, institutions, and instruments in relation to securitisations and credit derivatives; credit portfolio risk; credit portfolio risk tranching; credit ratings for securitisations; counterparty credit risk and clearing of derivatives contracts and liquidity risk. As well as a thorough analysis of the existing models used in the industry, the book will also draw on real life cases to illustrate model performance under different parameters and the impact that using the wrong risk measures can have.

Credit derivatives have been instrumental in the recent increase in securitization activity. The complex nature and the size of the market have given rise to very complex counterparty credit risks. The Lehman failure has shown that these issues can paralyse the financial markets, and the need for detailed understanding has never been greater. The Art of Credit Derivatives shows practitioners how to put a framework in place which will support the securitization activity. By showing the models that support this activity and linking them with very practical examples, the authors show why a mind-shift within the quant community is needed – a move from simple modeling to a more hands on mindset where the modeler understands the trading implicitly. The book has been written in five parts, covering the modeling framework; single name corporate credit derivatives; multi name corporate credit derivatives; asset backed securities and dynamic credit portfolio management. Coverage includes: groundbreaking solutions to the inherent risks associated with investing in securitization instruments how to use the standardized credit indices as the most appropriate instruments in price discovery processes and why these indices are the essential tools for short term credit portfolio management why the dynamics of systemic correlation and the standardised credit indices are linked with leverage, and consequently the implications for liquidity and solvability of financial institutions how L?vy processes and long term memory processes are related to the understanding of economic activity why regulatory capital should be portfolio dependant and how to use stress tests and scenario analysis to model this how to put structured products in a mark-to market-environment, increasing transparency for accounting and compliance. This book will be invaluable reading for Credit Analysts, Quantitative Analysts, Credit Portfolio Managers, Academics and anyone interested in these complex yet important markets.

Richard Flavell has a strong theoretical perspective on swaps with considerable practical experience in the actual trading of these instruments. This rare combination makes this welcome updated second edition a useful reference work for market practitioners. —Satyajit Das, author of Swaps and Financial Derivatives Library and Traders and Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives Fully revised and updated from the first edition, Swaps and Other Derivatives, Second Edition, provides a practical explanation of the pricing and evaluation of swaps and interest rate derivatives. Based on the author’s extensive experience in derivatives and risk management, working as a financial engineer, consultant and trainer for a wide range of institutions across the world this book discusses in detail how many of the wide range of swaps and other derivatives, such as yield curve, index amortisers, inflation-linked, cross-market, volatility, diff and quanto diffs, are priced and hedged. It also describes the modelling of interest rate curves, and the derivation of implied discount factors from both interest rate swap curves, and cross-currency adjusted curves. There are detailed sections on the risk management of swap and option portfolios using both traditional approaches and also Value-at-Risk. Techniques are provided for the construction of dynamic and robust hedges, using ideas drawn from mathematical programming. This second edition has expanded sections on the credit derivatives market – its mechanics, how credit default swaps may be priced and hedged, and how default probabilities may be derived from a market strip. It also prices complex swaps with embedded options, such as range accruals, Bermudan swaptions and target accrual redemption notes, by constructing detailed numerical models such as interest rate trees and LIBOR-based simulation. There is also increased discussion around the modelling of volatility smiles and surfaces. The book is accompanied by a CD-ROM where all the models are replicated, enabling readers to implement the models in practice with the minimum of effort.