Today’s 45-minute movie reviews credit derivatives (in regard to themovie schedule, we are currently located at Module III. 4 and III. 5).We review the basic products (credit default swap, total rate of returnswap, and credit spread options), synthetic structures (e.g.,credit-linked notes, collateralized debt obligations) and we walkthrough Hull’s example of the valuation of a credit default swap.
Thevaluation of the credit default swap is not so too difficult once yourealize that the present, expected value of: [payments made by thedefault swap buyer; i.e., the buyer of credit protection] should equalthe present, expected value of: [a payoff received by the buyer, in thecontingent credit event]. The valuation then becomes an exerce insolving for two different future streams and solving for the spreadthat makes them equal.
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New Movie: Loss Given DefaultPosted by David Harper on 11th August 2006
Today’s45-minute movie has been published for subscribers of our 2006 FRMservice. The movie is Credit Risk Intro - Part 2. We review threechapters from de Servigny’s book, Measuring and Managing Credit Risk.This includes loss given default (LGD), an important concept that is acomponent of Basel II’s internal rating-based (IRB) approach togenerating the capital requirement (K):
Also,we review the highlights of the credit risk portfolio models; i.e.,CreditMetrics, CreditPortfolioView, Portfolio Risk Tracker, PortfolioManager, and CreditRisk+. One way to categorize these models is alongthe following dimensions:
Wealso look at the very important concept of economic loss, which is thedifference between value at risk (VaR) and expected loss:
Finally we recap strategic capital allocation, where de Servigny argues that a top-down approach should precede (come before) a bottom-up approach.
