Advanced Credit Derivatives
December 5, 2012 May 14, 2012
Registration Fee: US$995.00 Register Location Instructor
Many classes sell out; we suggest registering at least one week in advance to ensure availability
Advanced Level, 7 CPE Credits
Instructor: David Oakes
Hours: 9:00 am - 5:00 pm; Registration/Breakfast begins at 8:30 am
With yields in the U.S. and elsewhere apparently stuck at low levels, many investors are looking to credit as a source of yield. But credit markets offer a vast and sometimes bewildering array of cash and derivatives investments to investors, and assessing risk and opportunity in credit markets has been made more complex by market and regulatory responses to the credit crisis.
In this interactive course, we examine the trading opportunities offered by a range of credit derivatives, including single-name credit default swaps (CDS), CDS index swaps and structured credit instruments. Attending the course will help you understand how credit risk is priced in these instruments and will improve your ability to construct, analyze and control trades that express outright or relative value views in credit markets.
Session 1: Credit Risk and Credit Spreads
In this session, we identify factors that contribute to credit risk and show how credit spreads measure the market price of this risk. By the end of the session, you will be able to:
- Identify factors that drive credit spreads
- Explain why credit spreads vary across the capital structure for a given company
- Explain, interpret and compare standard credit spread measures that are used in the market
Session 2: Credit Default Swaps and Credit Trading
In this session, we identify factors that affect pricing and risk in credit default swaps (CDS) and show how CDS are used to trade outright and relative value views on credit for single names and credit indexes. By the end of the session, you will be able to:
- Identify and analyse risk factors in single-name CDS transactions
- Explain, interpret and apply market-standard conventions for quoting, trading and marking to market CDS
- Construct and analyze trading strategies for single-name CDS contracts
- Describe the market for CDS index contracts
- Construct and analyze trading strategies for CDS indices
- Briefly describe the market for structured credit
- Describe how default correlation is traded in structured credit markets
Session 3: Pricing and Modeling Credit Default Swaps
In this session, we describe market-standard methods for pricing and revaluation of credit-default swaps. By the end of the session, you will be able to:
- Explain how CDS premiums are related to expected loss
- Show how risk-neutral default probabilities and expected loss given default can be used to calculate fair-value CDS premiums
- Calculate implied risk-neutral default probabilities from the market prices of corporate bonds and use these probabilities to price single-name CDS
- Calculate implied risk-neutral default probabilities from CDS premiums
- Describe and apply market-standard methods for implementing risk-neutral pricing and revaluation of CDS, including the ISDA CDS standard model
Session 4: Structured Credit
In this session, we show how the pricing and trading strategies of the previous sessions can be extended to the market for structured credit. By the end of the session, you will be able to:
- Describe the market for structured credit, including cash and synthetic collateralized debt obligations (CDO), synthetic single-tranche CDOs, tranches based on CDS indexes, and default baskets
- Show how simulation methods can be used to calculate the probability that losses on a credit portfolio exceed a specified threshold amount over a given period
- Explain how this technique can be used to drive models of CDOs, CDO tranches and default baskets
- Identify risk factors in structured credit