Book description
A step-by-step guide to credit derivatives and their application.
Mastering Credit Derivatives provides comprehensive coverage of this rapidly growing market. It will give you a clear understanding of what credit derivatives are, as well as explaining their benefits and risks.
In this fully revised and updated edition, Andrew Kasapis approaches the derivatives market from a practical basis, using examples of real market data and trades. He includes ideas and comments from market practitioners who offer valuable insights as to the likely direction the industry will take.
The book includes chapters on:
An assessment of the sub-prime crisis and how it has affected derivatives
Available derivative products and how they are applied
How best to value credit and how to price and risk-manage derivatives
An explanation of traunched indices and first-to-default baskets
Recently introduced products such as collateral synthetic obligations (CSOs) and collaterised debt obligations (CDOs)
Mastering Credit Derivatives is an invaluable guide that will help you to understand credit derivatives and apply them to your market place.
Table of contents
- Copyright
- Financial Times Prentice Hall
- About the author
- Preface
- Publisher’s acknowledgements
- 1. Introduction
- 2. Credit derivative instruments and applications
-
3. Pricing a CDS and the cash bond basis
- Credit Modelling
- Calibrating Recovery Rates
- A Practical Approach to Pricing a CDS
- Using Default Swaps to Make a Credit Curve
- Linking the Credit Default Swap and Cash Markets
- Cash and CDS Basis
- Bond Spread Measures and the CDS–bond Basis Definition
- Basis Drivers
- Summary: Credit Default Swaps Compared with Bonds
- 4. Credit derivatives documentation and regulations
-
5. Tranched indices
- Credit Default Swap Indices
- Determining the Upfront Payment
- Impact of Defaults on Index Cashflows
- Tranches of Standard Default Swap Indices
- Characteristics of Benchmark Tranches
- Investment Strategies with Credit Derivative Indices
- Investors
-
6. What is correlation?
- What do We Mean by Correlation?
- Correlation in Structured Credit Markets
- Observing Default Correlation
- Valuation in Structured Credit Markets
- Getting to a Portfolio Loss Distribution
- Copula Functions
- Correlation as a Relative Value Metric (Base Correlation)
- Base Correlation
- Practical use of Correlation
- Analysing a Portfolio of Credit Risk
- Modelling Correlated Defaults
- Simulating Correlated Defaults with a Copula
- What is Correlation Missing?
- A Summary of CDO Pricing
- Correlation Trading Rules of Thumb
- Copula Drawbacks
- 7. First-to-default (FTD) baskets
- 8. Cash CDOs
-
9. Synthetic CDOs
- What are Synthetic CDOs?
- Example of a Fully Unfunded Synthetic CDO
- Example of an AAA Reference Portfolio CDO
- Case Studies of Managed Synthetic CDOs or CSOs
-
Single-Tranche CDOs (STCDOs)
- Selection of reference portfolio
- Single-tranche CDO investment strategies
- Investment strategies
-
Relative value strategies
- Long/short position in on-the-run CDX IG tranches v. short/long position in matching off-the-run CDX IG tranches
- Long/short position in 5-year CDX IG tranches v. short/long position in 10-year CDX IG tranches
- Long/short position 3–100% CDX IG tranche with short/long position in CDX IG index v. short/long position in 0–3% CDXIG tranche
- Micro/macro hedging strategies
- CSO Trade Opportunities
-
Synthetic CDO Structures
- Attachment and detachment points
- Why synthetic CDOs?
- Funding gap and the super senior tranches
- Increased flexibility and customization
- Range of permissible assets
- Efficiency of unfunded liabilities
- Taxonomy of synthetic CDOS
- Balance sheet versus arbitrage
- Static v. managed
- Funded v. unfunded
- Rating agency approaches to synthetic CDOs
- Moody’s
- Standard & Poor’s (S&P)
- Fitch
- Analytical Challenges in Modelling Synthetic CDOs
- The ABCs of CDOs-squared
- 10. Understanding tranche sensitivity
-
11. Innovation, the credit crisis and the future
- Innovation Outstrips Risk Management
- Subprime Mortgage Crisis of 2007
-
Credit Crisis Events in Context
- Substantially lower risk tolerance among investors
- From easy money...
- ...via financial innovation...
- ...to tight money
- Decreasing value
- Increasing credit spreads
- Slumping stock market
- Reversing carry trade
- Investors seek a safe haven
- Volatility and mark-to-market
- Liquidity crisis
- Central banks meet most urgent need
- Action Taken
- Subprime Credit Crunch: A Summary
- Subprime and Credit Crunch Debate
- How Regulators and Banks Improve Risk Management
- Notes and references
- Glossary
Product information
- Title: Mastering Credit Derivatives: A step-by-step guide to credit derivatives and structured credit, Second Edition
- Author(s):
- Release date: January 2009
- Publisher(s): Pearson
- ISBN: 9780131370463
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