Duration: 2 days
- The Global Credit Crisis and Financial Markets
- Structural and Reduced Form Models
- Modelling Credit Correlations
- Measuring Portfolio Credit VaR and Economic Capital
- Modelling and Measuring Counterparty Risk
- Using Collateral and Margin Calls
- Using Credit Derivatives in Credit Risk Management
- The Future Use of Securitization to Manage Credit Risk
The objective 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 and 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; the introduction of
the new Basel framework for capital coverage; and, of course, the market turbulence that followed
in the wake of the “subprime” crisis.
We then take you 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 take a critical look at Gaussian copula model
and explain how these models have been used – and misused - in justifying AAA-ratings of CDOs.
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 explain how “economic
capital” is calculated, and how economic capital is used as basis for risk-adjusted performance
measurement and internal capital allocation. We also explain how counterparty risk arising from OTC
derivative and securities lending transactions can be modelled and measured.
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.
We give a history of the rise, decline, and fall of securitization, and we give and overview of
industry and policy initiatives aimed at restarting sustainable securitization.
Day One
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
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
-
Managing Counterparty 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
- 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