Modern Credit Derivatives

 

"Very enjoyable and informative course. Clearly presented and well delivered by facilitator"

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Course Outline

A practical 2-day workshop on managing, using and pricing credit derivatives. Presented by Dr Jon Gregory

The credit derivative market has changed substantially in the last few years and an understanding of these instruments is integral to making sense of today's financial markets.

This two-day course provides a comprehensive overview of credit default swaps (CDSs) and other credit derivatives. A thorough analysis of the global financial crisis, what went wrong and the future of credit derivatives will be considered. CDSs are analysed in detail with consideration given to their uses but also the various risks they present. Counterparty risk and the role of central counterparties in mitigating this will be discussed thoroughly.

The course will also provide an in-depth description of other significant credit derivative products including indices, options, baskets and CDOs as well as addressing the various motivations and historical development of this market. Pricing aspects are covered with simple practical exercises to illustrate the key points. Participants take away worked examples for use after the course.

Key aspects of the course

  • Learn about the history and changes in the credit derivatives market in response to the global financial crisis.
  • Hear about the used and risks of credit default swaps in detail.
  • Analyse counterparty risk for credit derivatives and learn about the role of central counterparties in mitigating this.
  • Gain a thorough overview of all other significant credit derivative products.
  • Understand the basic pricing aspects for CDS and other credit derivatives.
  • Find out about the various forms of CDOs and analyse their pricing and whether they make sense as a product 

Who The Course is For

  • Traders
  • Loan officers
  • Risk managers
  • Credit officers
  • Fixed Income professionals
  • Corporate bankers
  • Regulators
  • Investors
  • Legal
  • Back and middle office
  • Product control

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Prior Knowledge

Participants only need a general knowledge of the capital markets for day 1. For day 2, some basic quantitative knowledge for covering the pricing aspects will be required.


This program is eligible for 16 Continuing Education credit hours from the CFA Institute. If you are a CFA Institute member, CE credit for your participation in this program will be automatically recorded in your CE Diary.


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Day One

Credit Default Swaps

  • Rationale for a CDS
  • Credit events
  • CDS trading conventions
  • The CDS auction
  • Sovereign CDS
  • Dangers of CDSs

Example: simple spread based pricing of a CDS and example of unwinding a CDS

Default probability, recovery rates and credit spreads

  • Default probabilities
  • Historical data
  • Recovery rates
  • Credit spreads and default probabilities
  • The CDS basis

Workshop: Analysis of empirical default data

Pricing CDS

  • Default probability and hazard rates
  • Approximate formulas
  • Pricing a CDS and comparing to CDSW
  • Up-front payments and impact of curve shape
  • Calibrating a credit curve
  • Forward CDS rates

Workshop: Calculating implied default probability and pricing CDS with up-front payments, converting from up-front to running spreads. Comparing to CDSW function in Bloomberg

Central counterparties for CDS

  • Wrong way risk
  • Rationale
  • Multilateral netting
  • The mechanics of trading through a CCP
  • Margining and the loss waterfall
  • Important CCP questions

Day Two

Indices, options and baskets

  • CDS indices
  • Index trading, roll mechanics and index spread
  • CDS options
  • First to default (FTD) and other basket structure
  • Intuitive pricing of baskets

Workshop: pricing of forward CDS, CDS option and baskets

Collateralised Debt Obligations (CDOs)

  • Types of CDO
  • Cash CDOs
  • Waterfall and excess spread calculation
  • Index tranches
  • Synthetic CDOs

Pricing CDOs

  • Pricing formula for a CDO
  • The Gaussian copula approach
  • Base correlation
  • Mapping approaches
  • Pricing bespoke CDOs
  • Why and how base correlation fails

Workshop: Pricing index tranches and bespoke CDOs

Why do CDOs fail?

  • Counterparty risk in tranches
  • Monolines
  • Economics of a typical CDO structure
  • The super senior failure
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