Advanced Credit Risk Modelling and Management
Duration:
2 days
2 days
Location:
Prague, Mövenpick Hotel
Prague, Mövenpick Hotel
- Structural and Reduced Form Models
- Factor Copula Models
- Measuring Portfolio Credit VaR and Economic Capital
- Using Collateral and Margin Calls
- Using Credit Derivatives in Credit Risk Management
- Using Securitization to Manage Credit Risk
- CDO’s and Synthetic CDO’s
The purpose of this advanced-level seminar is to give you a thorough understanding of state-of-the-art tools and techniques for measuring and managing credit risks.
First, we discuss important market developments that have lead to an increased focus on the management of credit risk: The integration of market and credit risk, the increasing use of off-balance financing techniques and complex structures such as CDO-Squared, and the introduction of the new Basel framework for capital coverage.
We then take you far beyond the Basel guidelines to develop a powerful program for controlling your firm’s credit risk. We explain how different credit risk modelling techniques, including structural models (such as Merton, Black and Cox, Longstaff and Schwartz, Zhou and Hull and White), as well as “reduced form” models (such as Duffie and Singleton and Lando), can be used for the estimation of credit default risk and default correlations. We also consider the one-factor Gaussian copula model and other stochastic correlation models that account for the correlation smile in the pricing of synthetic CDO tranches. We analyse these models through their conditional default probability distributions.
Further, we explain how “Credit VaR” is calculated and used as basis for risk-adjusted pricing of loans, bonds and more complex structures, and for allocation of risk capital. We also explain how “Economic Capital” is calculated by determining the amount of capital that the firm needs to ensure that its realistic balance sheet stays solvent, and how this capital is used as basis for risk-adjusted performance measurement and internal capital allocation.
Further, we present and explain methods for transfer, repackaging and mitigation of credit risk, including the use of collateral, margining, credit guarantees, and credit derivates. We give an in-depth explanation of the mechanics and pricing of the instruments, and we give examples of how credit default swaps, total return swaps and credit options are used to gain or reduce exposure to credit risk and credit spread risk.
Finally, we explain how credit risk can be bundled, repackaged and sold as Asset Backed Securities, CDO’s and synthetic CDO’s. We explain how these instruments are constructed, priced and hedged, and we discuss their role in the recent “subprime” credit crisis.
First, we discuss important market developments that have lead to an increased focus on the management of credit risk: The integration of market and credit risk, the increasing use of off-balance financing techniques and complex structures such as CDO-Squared, and the introduction of the new Basel framework for capital coverage.
We then take you far beyond the Basel guidelines to develop a powerful program for controlling your firm’s credit risk. We explain how different credit risk modelling techniques, including structural models (such as Merton, Black and Cox, Longstaff and Schwartz, Zhou and Hull and White), as well as “reduced form” models (such as Duffie and Singleton and Lando), can be used for the estimation of credit default risk and default correlations. We also consider the one-factor Gaussian copula model and other stochastic correlation models that account for the correlation smile in the pricing of synthetic CDO tranches. We analyse these models through their conditional default probability distributions.
Further, we explain how “Credit VaR” is calculated and used as basis for risk-adjusted pricing of loans, bonds and more complex structures, and for allocation of risk capital. We also explain how “Economic Capital” is calculated by determining the amount of capital that the firm needs to ensure that its realistic balance sheet stays solvent, and how this capital is used as basis for risk-adjusted performance measurement and internal capital allocation.
Further, we present and explain methods for transfer, repackaging and mitigation of credit risk, including the use of collateral, margining, credit guarantees, and credit derivates. We give an in-depth explanation of the mechanics and pricing of the instruments, and we give examples of how credit default swaps, total return swaps and credit options are used to gain or reduce exposure to credit risk and credit spread risk.
Finally, we explain how credit risk can be bundled, repackaged and sold as Asset Backed Securities, CDO’s and synthetic CDO’s. We explain how these instruments are constructed, priced and hedged, and we discuss their role in the recent “subprime” credit crisis.
Moody’s KMV™ is registered trade mark of Moody’s KMV.
Modelling Default Risk and Default Correlations
- Structural Models for Default Risk
- Modelling Credit Risk as an Option
- Merton’s Option-Theoretical Model
- Models with an exogenous default boundary
- Models with an endogenous default boundary
- Case Studies
- Moody’s KMV™
- CreditGrades
- An Empirical Valuation of Structural Credit Risk Models
- Practical Case Studies and Exercises
12.00 - 13.00 Lunch
13.00 - 16.30 Modelling Default Risk and Default Correlations (Continued)
- Reduced form Models for Default Risk
- Duffie and Singleton
- Lando
- Extracting default probabilities and dependencies from market prices
- Copula Models
- Specifying the joint distribution of survival times from market information
- Using copula functions in the valuation of credit derivatives
- The Term Structure of Credit Risk
- Measuring Credit Portfolio VaR
- Measuring Economic Capital
- Risk-Based Loan Pricing
- Practical Case Studies and Exercises
Day Two
09.00 - 09.15 Brief recap
09.15 - 12.00 Managing Credit Risk
- Overview of Methods for Managing Credit Risk
- Using Collateral to Manage Credit Risk
- Calculating the “haircut”
- Collateral management
- Using Margining to Manage Credit Risk
- Using Credit Derivatives to Transfer Credit Risk
- Overview of credit derivatives and their mechanics
- Credit default swaps
- Total return swaps
- Credit options and credit spread options
- Using “nth-to-default” swaps
- Hedging counterparty risk with dynamic credit default swaps
- Using iTraxx and CDX to gain or remove “macro” credit exposure
- Delta-hedging CDO-tranches
- Practical Case Studies and Exercises
12.00 - 13.00 Lunch
13.00 - 16.00 Managing Credit Risk (Continued)
- Using Securitization to Transfer Credit Risk
- “Traditional” asset-backed securitization
- Securitization of receivables
- Securitization of bank loans and bond portfolios
- Improving RAROC through securitization
- Synthetic securitization
- Hybrid securitization transactions
- Legal and accounting issues in securitization
- Treatment of securitization under Basel II
- Practical Case Studies and Exercises
Evaluation and Termination of the Seminar
Moody’s KMV™ is registered trade mark of Moody’s KMV.
