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Risk Management & Insurance
Credit Derivatives: Applications In Risk Management

Credit Derivatives: Applications In Risk Management

ISBN: 978 I 85564 639 3

No. of Pages: 156

Publisher: Euromoney Books

Credit Derivatives: Applications In Risk Management outlines global trends, analyses the products and their uses in emerging markets, discusses the market’s participants and their application of credit derivative products, examines risk management in a credit derivatives business, accounting for credit derivatives, pricing, the impact of EMU, synthetic credit structures, rating methodologies, and the regulatory environment. Accounting, ratings, derivatives, securitisation, securitization, fixed income.

Price: £175  


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"... definitely an indispensable resource for institutional investors and other interested parties." - Sohail Jaffer, Chairman, AIMA.

Written by market professionals, this book is an accessible guide to this new generation of products. The book outlines global trends, analyses the products and their uses in emerging markets, discusses the market's participants and their application of credit derivative products, examines risk management in a credit derivatives business, accounting for credit derivatives, pricing, the impact of EMU, synthetic credit structures, rating methodologies, and the regulatory environment. (156 pages) Published in association with Barclays Capital, Helaba Landesbank Hessen-Thüringen; PricewaterhouseCoopers.

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Table of Contents

CONTENTS

Author biographies viii



Introduction 1 Credit derivatives: a revolution in the financial markets

2 The distinctive features of credit spreads

3 Credit swaps

5 Total return swaps

6 Spread options

7 Credit-linked notes

8 The Chase Secured Loan Note: a case study

9 Conclusion and market outlook



Chapter 1 11 Credit derivatives in emerging markets: a product analysis

12 Access

12 Optimal exposure

12 Risk management

13 Structures and mechanics

13 Product analysis



Chapter 2 23 The market participants: applying credit derivatives

23 Introduction

24 Credit derivatives for commercial banks

27 Credit derivatives for investment banks

29 Credit derivatives for institutional investors

31 Credit derivatives for the insurance/reinsurance industry

32 Credit derivatives for corporates

34 Summary and outlook



Chapter 3 35 Risk management in a credit derivatives business

36 Types of credit derivatives

37 Sources of risk

44 The risk management process

51 Conclusion



Chapter 4 53 The pricing of credit derivatives

53 Credit risk and credit derivatives

54 Pricing a default swap

55 Pricing procedures

61 Pricing a credit spread option

62 Summary



Chapter 5 63 The convergence of the trading environment with the credit department

63 Introduction

63 The current role of the credit department

64 The role of the trading department

65 The impact of credit derivatives

66 Portfolio credit risk modelling

67 Internal risk models for capital

68 The future

68 Conclusion



Chapter 6 71 Event risk management and arbitrage: synthetic credit structures

71 The diversification, pooling and transfer of credit risk via credit-linked investment vehicles

75 The principle of credit arbitrage: relative value in the pricing of credit risk

78 The role of asset volatility in valuing the option of default

79 Tranched and pooled structures: collateralised debt obligations

81 Emerging market collateralised bond obligations: market volatility, duration and the term structure of

emerging market credit risk

83 Swap-dependent structures: insurance derivatives, price-indexed synthetics and credit derivative-linked

debt issues

85 The evaluation of model performance

88 Entry: convergence between the credit and reinsurance markets

91 The use of credit derivatives to credit-wrap synthetic note structures

92 Rating credit-linked structured notes

93 Volatility and correlation (uncorrelated credit/default events)

94 Examples of simple credit derivatives, complex strategies and their rating implications

97 Default estimates and the indexing of credit risk



Chapter 7 103 The regulatory environment

103 The current capital regime

106 Why the regulatory environment is important for credit derivatives

106 The United States: the Federal Reserve System's approach

109 The United Kingdom: the Bank of England's approach

110 France: the Commission Bancaire's approach

112 ISDA, LIBA and BBA: reactions to regulators' approaches



Chapter 8 117 Accounting for credit derivatives: US Generally Accepted Accounting Principles

117 Introduction

117 Intent

118 Credit default products

121 Total return swaps

123 Disclosure

125 Accounting developments



Chapter 9 127 Euro cash and euro futures markets: a look into the next millennium

127 The equity markets

128 The eurobond market

128 The futures markets

129 The role of a euro benchmark bond

129 The drawbacks of basket contracts

130 Creditworthiness and interest rate spreads

131 Trading systems and new products

131 Success factor liquidity

132 Europe's futures exchanges: cooperation or competition?

133 Market efficiency in the future



Appendix 135 Update of the 1997/98 BBA Credit Derivatives Survey

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