Credit Derivatives: Trading, Investing and Risk Management, Second Edition

Preface to the First Edition

This book arose out of several courses and training sessions given to finance professionals. Those courses, and this book, are aimed at traders in the credit and other derivatives, quants wishing to develop some product knowledge in this area, risk managers including the corporate treasurer, investors and others requiring both product knowledge and a grasp of valuation and risk. The aim is to develop an understanding of the various credit derivatives products. In order to achieve this it is necessary for the reader to have a certain amount of financial background - and a certain level of maturity when it comes to understanding structured products and the management of a portfolio of risks. I have tried to cover key credit background in Part I of the book. Readers with experience in this area can skip through most of the topics covered here - though generally the role of repo, and the difference between asset swap spreads and z-spreads, do not appear to be well understood, and the reader is advised to study these sections at least. Other areas that may be unfamiliar are the calibration of transition matrices to market data (spreads and volatilities), and the generation of correlated spread moves using the Normal ‘Copula’.

The most common credit derivative product is the credit default swap (CDS), and this is covered along with other ‘single name’ credit derivatives in Part II. A relatively simple ‘deterministic’ pricing model is described, together ...