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Table Of Contents

What are Credit Derivatives?
Features of default swaps
The default swap premium
The reference obligation
What constitutes default?
Cash versus physical settlement
Hedging with default swaps
Does a default swap hedge credit deterioration risk?
Does a default swap hedge against market risk?
Types of default swaps
Key benefits of default swaps
Total Rate of Return Swaps (TRORs)
What is a TROR?
Why TRORs?
Hedging with TRORs
The difference between a TROR and a default swap
The difference between a TROR and an asset swap
The difference between a TROR and an equity swap
The relationship between a TROR and a Repo
Key benefits of TRORs
Credit-spread Products
Credit-spread options
Hedging with credit-spread options
Credit-spread forwards
Credit-spread swaps
When to hedge and with what credit-spread product
Questions and Problems
Notes
Credit-Linked Notes (CLNs)
A more complex credit-linked note structure
Collateralized Debt Obligations (CDOs)
Synthetic CDOs
Market value CDOs and cash flow CDOs
Tranched portfolio default swaps (TPDS)
Tranched basket default swaps (TBDSs)
CDO squared structures
Rating
Recovery rates
Coverage ratios
Notching
Successful Synthetic Structures
Investing in Synthetic Structures – A good idea?
Questions andProblems
Hedging
Market risk
Market Risk
Credit risk
How are market risk and credit risk related?
Operational risk
Which credit derivative hedges which risk?
Yield Enhancement
Cost reduction
Convenience
Arbitrage
Regulatory Capital Relief
The Basel II Accord
Standardized versus IRB approach
Banking book versus trading book
Credit Derivatives Pricing Approaches
Simple approaches
The default swap premium derived from asset swaps
Deriving the default swap premium using arbitrage arguments
Basic Properties of the Black-Scholes-Merton model
Valuing credit-spread options on a term-structure based model
The original 1974 Merton model
The Black-Cox 1976 model
The Kim,Ramaswamy,and Sundaresan 1993 model
The Longstaff-Schwartz 1995 model
The Briys-de Varenne 1997 model22
Critical appraisal of first-time passage models
Reduced Form Models
The Jarrow-Turnbull 1995 model24
Critical appraisal of the Jarrow-Turnbull 1995 model
The Jarrow-Lando-Turnbull 1997 model28
Critical appraisal of the Jarrow-Lando-Turnbull 1997 model
Other Reduced Form Models
Duffie and Singleton (1999)
Das and Sundaram (2000)
Hull and White (2000)31
Hull and White (2001)
Pricing TRORs
Further research in valuing credit derivatives
The VAR Concept
Market VAR for a single linear asset
Risk Management with Credit Derivatives
Market VAR for a portfolio of linear assets
Market VAR for non-linear assets
Market VAR for a portfolio of options
Credit at Risk (CAR)
Determining CAR of investment grade bonds
Accumulated expected credit loss
CAR for a portfolio of assets
Reducing portfolio CAR with credit derivatives
Reducing CAR with default swaps
Reducing CAR with TRORs
Reducing CAR with credit-spread options
Credit risk models – structural versus reduced form
Key features of credit risk models
The Models in Detail
KMV’s Portfolio Manager17
JP Morgan’s CreditMetrics20
Kamakura’s Risk Manager22
CSFP’s Credit Risk+24
McKinsey’s Credit Portfolio View25
Results
So what’s the best model?
Summary of Chapter6
References and Suggestions for Further Reading
Appendix
Glossary ofNotation
Glossary ofTerms
Index
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Credit Derivatives

Credit Derivatives

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Published by: Arunabho369 on Aug 07, 2011
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