Credit Derivatives Trading, Investing, and Risk Management

The credit derivatives industry has come under close scrutiny over the past 2 years, with the Credit Crisis highlighting the instability of a number of credit structures and throwing the industry into turmoil. What has been made clear by recent events is the necessity for a thorough understanding of credit derivatives by all parties involved in a transaction, from traders, structurers, quants and investors.This book covers the subject 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. The book concentrates on practical issues and develops an understanding of the products through applications and detailed analysis of the risks and alternative means of trading. Credit Derivatives: Risk Management, Trading and Investing provides: A description of the key products, applications, and an analysis of typical trades including basis trading, hedging, and credit structuring Analysis of the industry standard 'default and recovery' and Copula models including many examples, and a description of the models' shortcomings Tools and techniques for the management of a portfolio or book of credit risks including appropriate and inappropriate methods of correlation risk management A thorough analysis of counterparty risk An intuitive understanding of credit correlation in reality and in the Copula modelThe book has been thoroughly updated to reflect the changes the industry has seen over the past 5 years, notably with an analysis of the lead up and causes of the credit crisis. It will contain 50% new material, which will include copula valuation and hedging, portfolio optimisation, portfolio products and correlation risk management, pricing in illiquid environments, chapters on the evolution of credit management systems, the credit meltdown and the mathematics of the credit bubble. The book is accompanied by a CD ROM which will illustrate the models used in the book and also provide an advanced valuation toolkit.Contents [Foreword] Preface Disclaimer AcknowledgementsPart I: Credit Background and Credit Derivatives 1. Credit Debt and other traditional credit instruments 2. Pricing Methods 3. Default & Recovery Data; Transition Matrices; Historical Pricing 4.The Credit Event for Debt 5. Asset Swaps and Asset Swap Spread; z-spread 6. Liquidity 7. Credit portfolios and portfolio risk Software examples: Transition matrix based pricing; historical and implied transition matrices Asset swap, z-spread, maturity spread calculations Portfolio correlation and VaRPart II: Credit Default Swaps and other Single Name Products 8. Credit Default Swaps: Product Description, and Simple Applications - 9. Valuation and Risk: Basic Concepts - 10. CDS Deal Examples 11. CDS/Bond Basis Trading 12. Sensitivities; Hedging Issues 13. Credit Linked Notes 14. Digital CDS 15. Basket CDS and Index CDS structures 16. Spread Options, Callable/Putable Bonds, Callable Asset Swaps, Callable Default Swaps 17. Total Return Swaps 18. Single Name Book management 19. CDS Pricing by Simulation Software examples: Deterministic model [Excel and MathCad] Debt valuation [Excel and MathCad] CDS valuation [Excel and MathCad] Sensitivity calculation examples [Excel and MathCad]Part III: Portfolio Products - Correlated stochastic recovery models, Semi-closed form solutions, Structure pricing Correlation in structures. CDOs and structured credit products - synthetic - static and standard index products - synthetic - bespoke, static and managed -#

GEOFF CHAPLIN studied mathematics at Cambridge (MA 1972) and Oxford (MSc 1973, DPhil 1975) and trained as an actuary (FFA 1978) while working in a life insurance company. He moved to the City in 1980 and has worked for major banks (including HSBC, Nomura International, and ABN AMRO). As a partner in Reoch Credit he has consulted to law firms, hedge funds, corporate treasurers, institutional investment funds and risk control departments of major banks in the areas of credit and mortality risk. He has been involved in the credit derivatives market since 1996 and life settlements structures since 2003. Geoff has also maintained strong academic interests – he was a visiting (emeritus) professor at the University of Waterloo, Canada, from 1987 until 1999. He has also published many articles in Risk, the Journal of the Institute and Faculty of Actuaries, and others, speaks regularly at conferences and is the author of Credit Derivatives: Risk management, Trading and Investing (John Wiley & Sons Ltd, 2005) and co-author of Life Settlements and Longevity Structures: Pricing and Risk Management: Investment and Structured Finance (John Wiley & Sons Ltd, 2009).