Advanced Credit Risk Modelling and Management

Thursday, November 4

09.00 - 09.15  Welcome and Introduction

09.15 - 12.00  New Challenges in Credit Risk Management

• Why Credit Risk Has Become More Important
• Credit Risk Management in a Post-Crisis Landscape
• The Integration of Market, Credit and Liquidity Risk
• Types of Credit Risks in Banking and Securities Trading
• Overview of Approaches to Modelling Credit Risk

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
• The Link between the Merton Model and the Basel IRB Risk Weight Function
• 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
  • Using copula functions in the valuation of credit derivatives
  • How copula models were misused by rating agencies and investment banks in constructing AAA-rated CDO tranches
• The Term Structure of Credit Risk
• Measuring Credit Portfolio VaR
• Measuring Economic Capital
• Risk-Based Loan Pricing
• Modelling and Measuring Counterparty Risk
• Practical Case Studies and Exercises

Friday, November 5

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
• Managing Counterparty Risk
  • ISDA CSA
• 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 “n^th-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
  • The rise, decline, and fall of securitization
  • “Traditional” asset-backed securitization
  • Securitization of receivables
  • Securitization of bank loans and bond portfolios
  • Securitization and the “shadow banking system”
  • Improving RAROC through securitization
  • Synthetic securitization
  • Hybrid securitization transactions
  • Legal and accounting issues in securitization
  • Treatment of securitization under Basel II - now and in the future
• Industry and policy initiatives aimed at restarting sustainable securitization
• Practical Case Studies and Exercises

Evaluation and Termination of the Seminar

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