{"product_id":"credit-derivatives-9780470686447","title":"Credit Derivatives","description":"\u003cb\u003eBook Synopsis\u003c\/b\u003e\u003cbr\u003eThis book covers the subject of  Credit Derivatives  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.\u003cbr\u003e\u003cbr\u003e\u003cb\u003eTable of Contents\u003c\/b\u003e\u003cbr\u003e\u003cp\u003ePreface to the First Edition xvii\u003c\/p\u003e \u003cp\u003ePreface to the Second Edition xix\u003c\/p\u003e \u003cp\u003eAcknowledgements xxi\u003c\/p\u003e \u003cp\u003eDisclaimer xxiii\u003c\/p\u003e \u003cp\u003eTable of Spreadsheet Examples and Software xxvii\u003c\/p\u003e \u003cp\u003eAbout the Author xxix\u003c\/p\u003e \u003cp\u003e\u003cb\u003ePart I Credit Background and Credit Derivatives 1\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003e1 Credit Debt and Other Traditional Credit Instruments 3\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e1.1 Bonds and Loans; Libor Rates and Swaps; ‘REPO’ and General Collateral Rates 3\u003c\/p\u003e \u003cp\u003e1.1.1 Bonds and Loans 3\u003c\/p\u003e \u003cp\u003e1.1.2 BBA Libor and Swaps 4\u003c\/p\u003e \u003cp\u003e1.1.3 Collateralised Lending and Repo 4\u003c\/p\u003e \u003cp\u003e1.1.4 Repo as a Credit Derivative 6\u003c\/p\u003e \u003cp\u003e1.2 Credit Debt Versus ‘Risk-Free’ Debt 6\u003c\/p\u003e \u003cp\u003e1.3 Issue Documents, Seniority and the Recovery Process 6\u003c\/p\u003e \u003cp\u003e1.3.1 Issue Documents and Default 6\u003c\/p\u003e \u003cp\u003e1.3.2 Claim Amount 7\u003c\/p\u003e \u003cp\u003e1.3.3 The Recovery Process and Recovery Amount 8\u003c\/p\u003e \u003cp\u003e1.3.4 Sovereign versus Corporate Debt 9\u003c\/p\u003e \u003cp\u003e1.4 Valuation, Yield and Spread 10\u003c\/p\u003e \u003cp\u003e1.5 Buying Risk 10\u003c\/p\u003e \u003cp\u003e1.6 Marking to Market, Marking to Model and Reserves 11\u003c\/p\u003e \u003cp\u003e1.7 The ‘Credit Crunch’ and Correlation 12\u003c\/p\u003e \u003cp\u003e1.8 Parties Involved in the Credit Markets and Key Terminology 13\u003c\/p\u003e \u003cp\u003e\u003cb\u003e2 Default and Recovery Data; Transition Matrices; Historical Pricing 15\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e2.1 Recovery: Ultimate and Market-Value-Based Recovery 15\u003c\/p\u003e \u003cp\u003e2.1.1 Ultimate Recovery 15\u003c\/p\u003e \u003cp\u003e2.1.2 Market Recovery 16\u003c\/p\u003e \u003cp\u003e2.1.3 Recovery Rates and Industry Sector 18\u003c\/p\u003e \u003cp\u003e2.1.4 Recovery and Default Rates and the Economic Cycle 18\u003c\/p\u003e \u003cp\u003e2.1.5 Modelling Recovery Rates 18\u003c\/p\u003e \u003cp\u003e2.2 Default Rates: Rating and Other Factors 21\u003c\/p\u003e \u003cp\u003e2.3 Transition Matrices 21\u003c\/p\u003e \u003cp\u003e2.4 ‘Measures’ and Transition Matrix-Based Pricing 22\u003c\/p\u003e \u003cp\u003e2.5 Spread Jumps and Spread Volatility Derived from Transition Matrices 26\u003c\/p\u003e \u003cp\u003e2.6 Adjusting Transition Matrices 27\u003c\/p\u003e \u003cp\u003e\u003cb\u003e3 Asset Swaps and Asset Swap Spread; z-Spread 29\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e3.1 ‘Par–Par’ Asset Swap Contracts 29\u003c\/p\u003e \u003cp\u003e3.1.1 Contract Description and Hedging 29\u003c\/p\u003e \u003cp\u003e3.1.2 Hedging 29\u003c\/p\u003e \u003cp\u003e3.1.3 Default of the Reference Name 30\u003c\/p\u003e \u003cp\u003e3.2 Asset Swap Spread 30\u003c\/p\u003e \u003cp\u003e3.3 Maturity and z-Spread 30\u003c\/p\u003e \u003cp\u003e3.4 Callable Asset Swaps; ‘Perfect’ Asset Swaps 32\u003c\/p\u003e \u003cp\u003e3.4.1 Callable Asset Swaps 33\u003c\/p\u003e \u003cp\u003e3.4.2 ‘Perfect’ Asset Swaps 33\u003c\/p\u003e \u003cp\u003e3.5 A Bond Spread Model 33\u003c\/p\u003e \u003cp\u003e\u003cb\u003e4 Liquidity, the Credit Pyramid and Market Data 35\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e4.1 Bond Liquidity 35\u003c\/p\u003e \u003cp\u003e4.2 The Credit Pyramid 35\u003c\/p\u003e \u003cp\u003e4.3 Engineered and Survey Data 37\u003c\/p\u003e \u003cp\u003e4.3.1 Survey Data 37\u003c\/p\u003e \u003cp\u003e4.3.2 Engineered Data 38\u003c\/p\u003e \u003cp\u003e4.4 Spread and Rating 39\u003c\/p\u003e \u003cp\u003e\u003cb\u003e5 Traditional Counterparty Risk Management 41\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e5.1 Vetting 41\u003c\/p\u003e \u003cp\u003e5.2 Collateralisation and Netting 41\u003c\/p\u003e \u003cp\u003e5.3 Additional Counterparty Requirements for Credit Derivative Counterparties 42\u003c\/p\u003e \u003cp\u003e5.4 Internal Capital Charge 42\u003c\/p\u003e \u003cp\u003e\u003cb\u003e6 Credit Portfolios and Portfolio Risk 43\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e6.1 VaR and counterpartyVaR 43\u003c\/p\u003e \u003cp\u003e6.2 Distribution of Forward Values of a Credit Bond 43\u003c\/p\u003e \u003cp\u003e6.3 Correlation and the Multi-Factor Normal (Gaussian) Distribution 45\u003c\/p\u003e \u003cp\u003e6.4 Correlation and the Correlation Matrix 46\u003c\/p\u003e \u003cp\u003e\u003cb\u003e7 Introduction to Credit Derivatives 49\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e7.1 Products and Users 49\u003c\/p\u003e \u003cp\u003e7.1.1 ‘Traditional’ Credit Instruments 49\u003c\/p\u003e \u003cp\u003e7.1.2 ‘Single Name’ Credit Derivatives 49\u003c\/p\u003e \u003cp\u003e7.1.3 Credit-Linked Notes 50\u003c\/p\u003e \u003cp\u003e7.1.4 Portfolio Credit Derivatives 50\u003c\/p\u003e \u003cp\u003e7.2 Market Participants and Market Growth 51\u003c\/p\u003e \u003cp\u003e\u003cb\u003ePart II Credit Default Swaps and other Single Name Products 55\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003e8 Credit Default Swaps; Product Description and Simple Applications 57\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e8.1 CDS Product Definition 57\u003c\/p\u003e \u003cp\u003e8.1.1 Contract Description and Example 57\u003c\/p\u003e \u003cp\u003e8.1.2 Market CDS Quotes and Premium Payment 58\u003c\/p\u003e \u003cp\u003e8.1.3 Related Products 59\u003c\/p\u003e \u003cp\u003e8.1.4 CDS on Loans: LCDS 60\u003c\/p\u003e \u003cp\u003e8.2 Documentation 60\u003c\/p\u003e \u003cp\u003e8.2.1 ISDA Documentation and Insurance Contract Differences 60\u003c\/p\u003e \u003cp\u003e8.2.2 Reference Obligations, ‘Markit RED’ and CreditIDs 63\u003c\/p\u003e \u003cp\u003e8.3 Credit Triggers for Credit Derivatives 65\u003c\/p\u003e \u003cp\u003e8.3.1 Credit Events 65\u003c\/p\u003e \u003cp\u003e8.3.2 Restructuring 66\u003c\/p\u003e \u003cp\u003e8.4 CDS Applications and Elementary Strategies 67\u003c\/p\u003e \u003cp\u003e8.4.1 Single Names 67\u003c\/p\u003e \u003cp\u003e8.4.2 Sector\/Portfolio Trades 68\u003c\/p\u003e \u003cp\u003e8.4.3 Income Generation 69\u003c\/p\u003e \u003cp\u003e8.4.4 Regulatory Capital Reduction 70\u003c\/p\u003e \u003cp\u003e8.5 Counterparty Risk: PFE for CDS 71\u003c\/p\u003e \u003cp\u003e8.6 CDS Trading Desk 71\u003c\/p\u003e \u003cp\u003e8.6.1 Mechanics of Transacting a CDS Deal 71\u003c\/p\u003e \u003cp\u003e8.6.2 Trade Monitoring, Credit Events, Unwinds 72\u003c\/p\u003e \u003cp\u003e8.6.3 CDS Desk Interactions and Organisation 73\u003c\/p\u003e \u003cp\u003e8.7 CDS Contract and Convention Changes 2009 73\u003c\/p\u003e \u003cp\u003e8.7.1 Credit Derivatives: Review 73\u003c\/p\u003e \u003cp\u003e8.7.2 Overview of Recent Changes 74\u003c\/p\u003e \u003cp\u003e8.7.3 Contract Changes 74\u003c\/p\u003e \u003cp\u003e8.7.4 Convention Changes 79\u003c\/p\u003e \u003cp\u003e\u003cb\u003e9 Valuation and Risk: Basic Concepts and the Default and Recovery Model 81\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e9.1 The Fundamental Credit Arbitrage – Repo Cost 81\u003c\/p\u003e \u003cp\u003e9.2 Default and Recovery Model; Claim Amount 82\u003c\/p\u003e \u003cp\u003e9.2.1 Claim Amount 82\u003c\/p\u003e \u003cp\u003e9.2.2 Recovery Modelling 83\u003c\/p\u003e \u003cp\u003e9.2.3 Hazard (Default) Rate Model 85\u003c\/p\u003e \u003cp\u003e9.2.4 Choice of Hazard Rate Function\/Interpolation Process 85\u003c\/p\u003e \u003cp\u003e9.3 Deterministic Default Rate Model 87\u003c\/p\u003e \u003cp\u003e9.3.1 CDS Valuation 88\u003c\/p\u003e \u003cp\u003e9.3.2 Accrued Interest and the Delivery Option 90\u003c\/p\u003e \u003cp\u003e9.3.3 CDS Under Constant Hazard Rate 91\u003c\/p\u003e \u003cp\u003e9.3.4 Up-front Premiums 91\u003c\/p\u003e \u003cp\u003e9.3.5 Bond Valuation 91\u003c\/p\u003e \u003cp\u003e9.3.6 Bond Price Under a Constant Hazard Rate 92\u003c\/p\u003e \u003cp\u003e9.3.7 Limiting Cases of the Bond Price 92\u003c\/p\u003e \u003cp\u003e9.3.8 Risky Zero Coupon Bonds 93\u003c\/p\u003e \u003cp\u003e9.3.9 CDS and Bond Sensitivities 93\u003c\/p\u003e \u003cp\u003e9.4 Stochastic Default Rate Model; Hazard and Pseudo-Hazard Rates 94\u003c\/p\u003e \u003cp\u003e9.5 Calibration to Market Data 97\u003c\/p\u003e \u003cp\u003e9.5.1 Calibrating to CDSs and to Bonds 97\u003c\/p\u003e \u003cp\u003e9.5.2 Implied Hazard Rates 98\u003c\/p\u003e \u003cp\u003e9.5.3 Calibrating to Bonds: Multiple Solutions for the Hazard Rate 98\u003c\/p\u003e \u003cp\u003e9.5.4 Calibrating to Bonds: Implied Recovery and Hazard Rates 98\u003c\/p\u003e \u003cp\u003e9.5.5 Implied Hazard Rate Curve and No-Arbitrage 101\u003c\/p\u003e \u003cp\u003e9.5.6 Syndicated Loans 101\u003c\/p\u003e \u003cp\u003e9.6 CDS Data\/Sources 102\u003c\/p\u003e \u003cp\u003e9.6.1 Survey Data 102\u003c\/p\u003e \u003cp\u003e9.6.2 Data Engineering 104\u003c\/p\u003e \u003cp\u003e9.7 Model Errors and Tests 105\u003c\/p\u003e \u003cp\u003e9.7.1 Recovery Assumption 105\u003c\/p\u003e \u003cp\u003e9.7.2 Interest and Hazard Rate Correlation 106\u003c\/p\u003e \u003cp\u003e9.7.3 Reference Name and Counterparty Hazard Rate Correlation 106\u003c\/p\u003e \u003cp\u003e9.7.4 Interpolation Assumptions, and the Pseudo-Hazard Rate versus Stochastic Hazard Rate 108\u003c\/p\u003e \u003cp\u003e9.8 CDS Risk Factors; Reserves and Model Risk 108\u003c\/p\u003e \u003cp\u003e9.8.1 Captured and Hidden Risks 108\u003c\/p\u003e \u003cp\u003e9.8.2 Limits 109\u003c\/p\u003e \u003cp\u003e9.8.3 Reserves against Implementation Errors 109\u003c\/p\u003e \u003cp\u003e9.8.4 Model Reserves 111\u003c\/p\u003e \u003cp\u003e\u003cb\u003e10 CDS Deal Examples 113\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e10.1 A CDS Hedged Against Another CDS 113\u003c\/p\u003e \u003cp\u003e10.1.1 Cross-Currency Default Swap Pricing and Hedging 113\u003c\/p\u003e \u003cp\u003e10.1.2 Back-to-Back Trades, Default Event Hedges and Curve Trades 118\u003c\/p\u003e \u003cp\u003e10.1.3 Hedging Both Credit Event and Spread Risk Simultaneously 120\u003c\/p\u003e \u003cp\u003e10.1.4 Seniority Mismatch 122\u003c\/p\u003e \u003cp\u003e10.1.5 Trade Level Hedging and Book Basis Hedging 123\u003c\/p\u003e \u003cp\u003e10.2 Introduction to Bond Hedging 124\u003c\/p\u003e \u003cp\u003e10.2.1 Default Event Hedging 124\u003c\/p\u003e \u003cp\u003e10.2.2 Spread Hedging 125\u003c\/p\u003e \u003cp\u003e10.2.3 Convertible Bonds and Equity Risk 125\u003c\/p\u003e \u003cp\u003e10.3 Hedge and Credit Event Examples 126\u003c\/p\u003e \u003cp\u003e\u003cb\u003e11 CDS\/Bond Basis Trading 131\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e11.1 Bond Versus CDS: Liquidity 131\u003c\/p\u003e \u003cp\u003e11.2 Bond Repo Cost 132\u003c\/p\u003e \u003cp\u003e11.3 Bond Spread Measurement – z-Spread not Asset Swap Spread 133\u003c\/p\u003e \u003cp\u003e11.4 Bond Price Impact 133\u003c\/p\u003e \u003cp\u003e11.5 Embedded Options in Bonds and Loans 134\u003c\/p\u003e \u003cp\u003e11.6 Delivery Option in CDSs 135\u003c\/p\u003e \u003cp\u003e11.7 Payoff of Par 136\u003c\/p\u003e \u003cp\u003e11.8 Trigger Event Differences 136\u003c\/p\u003e \u003cp\u003e11.9 Embedded Repo Option 137\u003c\/p\u003e \u003cp\u003e11.10 Putting it All Together 138\u003c\/p\u003e \u003cp\u003e\u003cb\u003e12 Forward CDS; Back-to-Back CDS, Mark to Market and CDS Unwind 139\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e12.1 Forward CDS 139\u003c\/p\u003e \u003cp\u003e12.2 Mark-to-Market and Back-to-Back CDS 140\u003c\/p\u003e \u003cp\u003e12.3 Unwind Calculation; Off-Market Trade Valuation and Hedging 141\u003c\/p\u003e \u003cp\u003e12.4 ‘Double-Trigger CDS’ 142\u003c\/p\u003e \u003cp\u003e\u003cb\u003e13 Credit-Linked Notes 145\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e13.1 CLN Set-Up; Counterparty or Collateral Risk 145\u003c\/p\u003e \u003cp\u003e13.2 Embedded Swaps and Options 147\u003c\/p\u003e \u003cp\u003e13.3 Costs 148\u003c\/p\u003e \u003cp\u003e13.4 Applications 148\u003c\/p\u003e \u003cp\u003e13.5 CLN Pricing 149\u003c\/p\u003e \u003cp\u003e13.5.1 Basic Pricing 149\u003c\/p\u003e \u003cp\u003e13.5.2 CLN Pricing Model 149\u003c\/p\u003e \u003cp\u003e13.6 Capital Guaranteed Note 150\u003c\/p\u003e \u003cp\u003e\u003cb\u003e14 Digital or ‘Fixed Recovery’ CDS 155\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e14.1 Product Description 155\u003c\/p\u003e \u003cp\u003e14.2 Pricing, Hedging, Valuation and Risk Calculations 155\u003c\/p\u003e \u003cp\u003e14.2.1 Simple Pricing 155\u003c\/p\u003e \u003cp\u003e14.2.2 Recovery Assumptions 156\u003c\/p\u003e \u003cp\u003e14.2.3 Valuation and Hedging 156\u003c\/p\u003e \u003cp\u003e14.3 Trigger Event Differences 157\u003c\/p\u003e \u003cp\u003e\u003cb\u003e15 Spread Options, Callable\/Puttable Bonds, Callable Asset Swaps, Callable Default Swaps 159\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e15.1 Product Definitions 159\u003c\/p\u003e \u003cp\u003e15.1.1 Vanilla Spread Options and Variations 159\u003c\/p\u003e \u003cp\u003e15.1.2 Related Embedded Products 160\u003c\/p\u003e \u003cp\u003e15.1.3 Bond Price Options 161\u003c\/p\u003e \u003cp\u003e15.1.4 Applications 162\u003c\/p\u003e \u003cp\u003e15.2 Model Alternatives and a Stochastic Default Rate Model for Spread Option Pricing 162\u003c\/p\u003e \u003cp\u003e15.2.1 Model Approaches 162\u003c\/p\u003e \u003cp\u003e15.2.2 Hazard Rate Tree 163\u003c\/p\u003e \u003cp\u003e15.2.3 Callable High Yield Bonds 164\u003c\/p\u003e \u003cp\u003e15.3 Sensitivities and Hedging 164\u003c\/p\u003e \u003cp\u003e\u003cb\u003e16 Total Return Swaps 167\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e16.1 Product Definition and Examples 167\u003c\/p\u003e \u003cp\u003e16.2 Applications 167\u003c\/p\u003e \u003cp\u003e16.3 Hedging and Valuation 168\u003c\/p\u003e \u003cp\u003e16.3.1 Pricing and Hedging 168\u003c\/p\u003e \u003cp\u003e16.3.2 Valuation 169\u003c\/p\u003e \u003cp\u003e\u003cb\u003e17 Single Name Book Management 171\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e17.1 Risk Aggregation 171\u003c\/p\u003e \u003cp\u003e17.2 CreditVaR for CDSs 173\u003c\/p\u003e \u003cp\u003e\u003cb\u003e18 CDS and Simulation 175\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e18.1 The Poisson Model and Default Times 175\u003c\/p\u003e \u003cp\u003e18.2 Valuation by Monte Carlo Simulation 175\u003c\/p\u003e \u003cp\u003e18.3 Sensitivity 178\u003c\/p\u003e \u003cp\u003e\u003cb\u003ePart III Portfolio Products 181\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003e19 Portfolio Product Types 183\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e19.1 Nth-to-Default Baskets 184\u003c\/p\u003e \u003cp\u003e19.1.1 First-to-Default Product Definition and Example 184\u003c\/p\u003e \u003cp\u003e19.1.2 Documentation and Takeovers 185\u003c\/p\u003e \u003cp\u003e19.1.3 Second-(and Higher)-to-Default 187\u003c\/p\u003e \u003cp\u003e19.1.4 Applications 187\u003c\/p\u003e \u003cp\u003e19.2 ‘Synthetic’ CDOs 188\u003c\/p\u003e \u003cp\u003e19.2.1 Standard Indices: Markit iTraxx and Markit cdx 188\u003c\/p\u003e \u003cp\u003e19.2.2 Index Options and Modelling Spread 192\u003c\/p\u003e \u003cp\u003e19.2.3 CDO Structures on Standard Indices 194\u003c\/p\u003e \u003cp\u003e19.2.4 Bespoke Synthetic CDOs 195\u003c\/p\u003e \u003cp\u003e19.2.5 Managed Synthetic CDOs: Compliance Tests (OC and IC Tests; WARF; Diversity Score) and Substitutions 200\u003c\/p\u003e \u003cp\u003e19.2.6 CDO Squared 203\u003c\/p\u003e \u003cp\u003e19.2.7 Funded (CLN) and Unfunded (CDS) Tranches 205\u003c\/p\u003e \u003cp\u003e19.2.8 Relationship to nth-to-Default 206\u003c\/p\u003e \u003cp\u003e19.2.9 Applications 207\u003c\/p\u003e \u003cp\u003e19.2.10 Portfolio Optimisation 208\u003c\/p\u003e \u003cp\u003e19.3 Cashflow CDOs 210\u003c\/p\u003e \u003cp\u003e19.3.1 Reference Pools 211\u003c\/p\u003e \u003cp\u003e19.3.2 Income and Capital Waterfalls: Reserve Accounts 211\u003c\/p\u003e \u003cp\u003e19.3.3 Funding and SPVs 213\u003c\/p\u003e \u003cp\u003e19.3.4 Balance Sheet CDOs 215\u003c\/p\u003e \u003cp\u003e19.3.5 Diversification and Risk Reduction Trades; Credit Bank 218\u003c\/p\u003e \u003cp\u003e19.4 Credit Securitisations 220\u003c\/p\u003e \u003cp\u003e19.5 Rating 222\u003c\/p\u003e \u003cp\u003e19.6 Alternative Levered Credit Portfolio Products 222\u003c\/p\u003e \u003cp\u003e19.6.1 Cppi 223\u003c\/p\u003e \u003cp\u003e19.6.2 Cpdo 224\u003c\/p\u003e \u003cp\u003e19.6.3 Advantages of Market Value CDS Products 226\u003c\/p\u003e \u003cp\u003e\u003cb\u003e20 The Normal Copula and Correlation 227\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e20.1 Default Time Correlation 227\u003c\/p\u003e \u003cp\u003e20.1.1 Generating Correlated Default Times 227\u003c\/p\u003e \u003cp\u003e20.1.2 Intuitive Understanding of Default Time Correlation 227\u003c\/p\u003e \u003cp\u003e20.1.3 Implications of 100% Default Time Correlation 229\u003c\/p\u003e \u003cp\u003e20.1.4 N2D, Zero Correlation Case – Exact Pricing and Hedging Formulas 230\u003c\/p\u003e \u003cp\u003e20.1.5 N2D, 100% Correlation – Exact Pricing and Hedging Formulas 234\u003c\/p\u003e \u003cp\u003e20.1.6 N2D, Recovery Uncertainty 235\u003c\/p\u003e \u003cp\u003e20.2 Normal Copula 236\u003c\/p\u003e \u003cp\u003e20.2.1 Generating Correlated Default Times under the Normal Copula 237\u003c\/p\u003e \u003cp\u003e20.2.2 Correlation Types: Pairwise, Tag, Tranche\/Compound and Base Correlation; Factor Correlation 238\u003c\/p\u003e \u003cp\u003e20.2.3 Simulation Pricing 239\u003c\/p\u003e \u003cp\u003e20.2.4 Variance Reduction Techniques 242\u003c\/p\u003e \u003cp\u003e20.2.5 Semi-Closed Form (SCF) Pricing 242\u003c\/p\u003e \u003cp\u003e20.3 Correlation 244\u003c\/p\u003e \u003cp\u003e20.3.1 Sources of Correlation 244\u003c\/p\u003e \u003cp\u003e20.3.2 Constraints: What Makes a Correlation Matrix? 245\u003c\/p\u003e \u003cp\u003e20.3.3 Spread Correlation 246\u003c\/p\u003e \u003cp\u003e20.3.4 Asset and Equity Correlation 247\u003c\/p\u003e \u003cp\u003e20.3.5 Estimation from Historical Data 248\u003c\/p\u003e \u003cp\u003e20.3.6 Factor Analysis and Factor Correlation; Tag Correlation 248\u003c\/p\u003e \u003cp\u003e20.3.7 Impact on Hedging of Using Historical or Implied Correlations 251\u003c\/p\u003e \u003cp\u003e20.3.8 Implied Correlation 251\u003c\/p\u003e \u003cp\u003e\u003cb\u003e21 Correlation in Practice 253\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e21.1 Tranche Correlation 253\u003c\/p\u003e \u003cp\u003e21.1.1 Valuation and Key Features 253\u003c\/p\u003e \u003cp\u003e21.1.2 Implied Tranche Correlation 256\u003c\/p\u003e \u003cp\u003e21.1.3 CDS Curve Adjustment 257\u003c\/p\u003e \u003cp\u003e21.1.4 Bid–Offer Impact 257\u003c\/p\u003e \u003cp\u003e21.2 Base Correlation 257\u003c\/p\u003e \u003cp\u003e21.2.1 Valuation and Key Features 258\u003c\/p\u003e \u003cp\u003e21.2.2 Implied Base Correlation 259\u003c\/p\u003e \u003cp\u003e21.2.3 Interpolating Base Correlation 260\u003c\/p\u003e \u003cp\u003e21.3 Correlated Recoveries 261\u003c\/p\u003e \u003cp\u003e21.4 Correlation Regime Change and Other Modelling Approaches 262\u003c\/p\u003e \u003cp\u003e21.4.1 Stochastic Correlation: Regime Change Models 262\u003c\/p\u003e \u003cp\u003e21.4.2 Spread Factor 263\u003c\/p\u003e \u003cp\u003e\u003cb\u003e22 Valuation and Hedging 265\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e22.1 Valuation Examples 265\u003c\/p\u003e \u003cp\u003e22.1.1 F2D Baskets 265\u003c\/p\u003e \u003cp\u003e22.1.2 CDO Pricing: Change of Correlation 265\u003c\/p\u003e \u003cp\u003e22.1.3 CDO Pricing: Change of Tranching 267\u003c\/p\u003e \u003cp\u003e22.1.4 CDO Pricing: Change of Underlying 268\u003c\/p\u003e \u003cp\u003e22.1.5 CDO Pricing: Change of Maturity 269\u003c\/p\u003e \u003cp\u003e22.1.6 Managed CDO: Substitution and Change of Subordination 269\u003c\/p\u003e \u003cp\u003e22.2 Sensitivity Calculation and Hedging 270\u003c\/p\u003e \u003cp\u003e22.2.1 Dynamic Hedging: Spread Risk 271\u003c\/p\u003e \u003cp\u003e22.2.2 Static Hedging: Default Event Risk 277\u003c\/p\u003e \u003cp\u003e22.2.3 Correlation Risk 279\u003c\/p\u003e \u003cp\u003e22.2.4 Recovery Risk 280\u003c\/p\u003e \u003cp\u003e22.2.5 Convexity Risks 281\u003c\/p\u003e \u003cp\u003e22.3 Pricing More Complex Structures 282\u003c\/p\u003e \u003cp\u003e22.3.1 CDO Squared 282\u003c\/p\u003e \u003cp\u003e22.3.2 Cashflow CDOs 282\u003c\/p\u003e \u003cp\u003e22.4 Model Errors and Tests; Alternative Models 284\u003c\/p\u003e \u003cp\u003e22.4.1 Captured and Hidden Risks 284\u003c\/p\u003e \u003cp\u003e22.4.2 Spread Models 284\u003c\/p\u003e \u003cp\u003e22.4.3 Reserves 285\u003c\/p\u003e \u003cp\u003e\u003cb\u003e23 Alternative Copulas 289\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e23.1 Student’s t-Distribution 289\u003c\/p\u003e \u003cp\u003e23.2 Copulas in General 290\u003c\/p\u003e \u003cp\u003e23.3 Archimedean Copulas: Clayton, Gumbel 291\u003c\/p\u003e \u003cp\u003e23.4 Clayton at θ = 0 and θ = ∞ 293\u003c\/p\u003e \u003cp\u003e23.5 Model Risk 293\u003c\/p\u003e \u003cp\u003e\u003cb\u003e24 Correlation Portfolio Management 297\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e24.1 Static and Dynamic Hedges 297\u003c\/p\u003e \u003cp\u003e24.2 Correlation Book Management 298\u003c\/p\u003e \u003cp\u003e24.3 CreditVaR and CounterpartyVaR 300\u003c\/p\u003e \u003cp\u003e\u003cb\u003ePart IV Default Swaps Including Counterparty Risk 303\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003e25 Single Name CDS 303\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e25.1 Non-Correlated Counterparty 305\u003c\/p\u003e \u003cp\u003e25.2 100% Correlation 306\u003c\/p\u003e \u003cp\u003e25.3 Correlated Counterparty: Pricing and Hedging 308\u003c\/p\u003e \u003cp\u003e25.4 Choice of Copula 309\u003c\/p\u003e \u003cp\u003e25.5 Collateralised Deals and CDS Book Management 309\u003c\/p\u003e \u003cp\u003e\u003cb\u003e26 Counterparty CDSs 313\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e26.1 Pricing 313\u003c\/p\u003e \u003cp\u003e26.2 Counterparty CDS (CCDS) Book Management 313\u003c\/p\u003e \u003cp\u003e\u003cb\u003ePart V Systems Implementation and Testing 317\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003e27 Mathematical Model and Systems Validation 319\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e27.1 Testing Procedures 319\u003c\/p\u003e \u003cp\u003e27.2 Implementation and Documentation 321\u003c\/p\u003e \u003cp\u003e\u003cb\u003e28 System Implementation 323\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e28.1 Anatomy of a CDO 323\u003c\/p\u003e \u003cp\u003e28.1.1 Reference Pool Data 323\u003c\/p\u003e \u003cp\u003e28.1.2 Tranche Data 324\u003c\/p\u003e \u003cp\u003e28.1.3 Deal Details 324\u003c\/p\u003e \u003cp\u003e28.2 Management 325\u003c\/p\u003e \u003cp\u003e28.2.1 What is Happening? 325\u003c\/p\u003e \u003cp\u003e28.2.2 What Has Happened? 326\u003c\/p\u003e \u003cp\u003e28.2.3 What is Likely to Happen and What is the Worst that can Happen? 326\u003c\/p\u003e \u003cp\u003e28.2.4 What Opportunities do I Have? 327\u003c\/p\u003e \u003cp\u003e28.2.5 Reporting 328\u003c\/p\u003e \u003cp\u003e28.2.6 Limits 328\u003c\/p\u003e \u003cp\u003e28.3 Valuation 329\u003c\/p\u003e \u003cp\u003e28.4 IT Considerations 331\u003c\/p\u003e \u003cp\u003e28.4.1 Why are Credit Derivatives Different? 331\u003c\/p\u003e \u003cp\u003e28.4.2 Spreadsheet 332\u003c\/p\u003e \u003cp\u003e28.4.3 Software Application 332\u003c\/p\u003e \u003cp\u003e28.4.4 Buy versus Build 333\u003c\/p\u003e \u003cp\u003e\u003cb\u003ePart VI the Credit Crisis 335\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e\u003cb\u003e29 Cause and Effect: Credit Derivatives and the Crisis of 2007 337\u003c\/b\u003e\u003c\/p\u003e \u003cp\u003e29.1 The Credit Markets Pre-Crisis 337\u003c\/p\u003e \u003cp\u003e29.1.1 Bank Motivation 337\u003c\/p\u003e \u003cp\u003e29.1.2 Fixed Income Investors 338\u003c\/p\u003e \u003cp\u003e29.1.3 Risk Traders versus Risk Absorbers 338\u003c\/p\u003e \u003cp\u003e29.1.4 Structured Investment Vehicles 339\u003c\/p\u003e \u003cp\u003e29.1.5 Market Liquidity 340\u003c\/p\u003e \u003cp\u003e29.2 The Events of MID- 2007 341\u003c\/p\u003e \u003cp\u003e29.2.1 Sub-prime Mortgages 341\u003c\/p\u003e \u003cp\u003e29.2.2 Investor Impact 342\u003c\/p\u003e \u003cp\u003e29.2.3 Bank Impact 343\u003c\/p\u003e \u003cp\u003e29.2.4 The Failure of Lehman Brothers and the Bailout of AIG 345\u003c\/p\u003e \u003cp\u003e29.3 Issues to be Addressed 346\u003c\/p\u003e \u003cp\u003e29.3.1 A Different Rating Agency Process 346\u003c\/p\u003e \u003cp\u003e29.3.2 Standardised Nomenclature for Credit Ratings 347\u003c\/p\u003e \u003cp\u003e29.3.3 Keeping a Percentage of Originated Risk on Balance Sheet 348\u003c\/p\u003e \u003cp\u003e29.3.4 Undrawn Credit Facility Capital Charge 348\u003c\/p\u003e \u003cp\u003e29.3.5 The Future of CDOs 349\u003c\/p\u003e \u003cp\u003e29.3.6 Mitigating the Negative Impact of Mark-to-Market 349\u003c\/p\u003e \u003cp\u003e29.4 Market Clearing Mechanisms 350\u003c\/p\u003e \u003cp\u003e29.4.1 Central Credit Counterparty 351\u003c\/p\u003e \u003cp\u003e29.4.2 Centralised Clearing and Systemic Risk 351\u003c\/p\u003e \u003cp\u003e29.4.3 A Dedicated CCP for CDSs Alone 352\u003c\/p\u003e \u003cp\u003e29.4.4 Conclusions 353\u003c\/p\u003e \u003cp\u003eAppendix Markit Credit and Loan Indices 355\u003c\/p\u003e \u003cp\u003eReferences 363\u003c\/p\u003e \u003cp\u003eIndex 365\u003c\/p\u003e","brand":"John Wiley \u0026 Sons Inc","offers":[{"title":"Default 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