5Credit Default Swaps

Part I, “What Is Credit Risk?” established the foundations of credit risk, discussing concepts such as default, probabilities of default, and credit spreads. Part II, “Credit Risk Modeling,” then focused on how credit risk models can be used to describe defaults and default probabilities. We focused on the structural approach to credit risk modeling, most notably the Merton model, and also looked at examples of empirical and reduced form models.

In the third and final part of this book, “Typical Credit Derivatives,” we now look at credit derivative instruments that help us manage credit risk. Chapter 2, “About Credit Risk,” contained a quick overview of credit derivatives, and we now focus on two specific instruments: ...

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