Seemann Applications of Credit Derivatives

Opportunities and Risks involved in Credit Derivatives
1. Auflage 2008
ISBN: 978-3-8366-0842-8
Verlag: diplom.de
Format: PDF
Kopierschutz: Adobe DRM (»Systemvoraussetzungen)

E-Book, Englisch, 98 Seiten

Inhaltsangabe:Abstract: The purpose of this thesis is to give a general introduction to the credit derivatives market and its instruments. The analytical focus will be about the business fields where credit derivatives are applied. This work aims to analyze the usage of credit derivatives in economic life and describes the different financial players who are involved in those deals. Explanations for certain decisions and credit views are presented. The reader should get a better understanding of these complex financial structures and their importance for businesses, banks and the overall global financial system. The pricing of such pooled financial structures is not as simple as the pricing of a stock or a bond; therefore selected pricing models are presented with the intention to show all the different factors which determine credit spreads and finally the price of a credit derivative. The thesis concludes with an evaluation of this young, but highly dynamic market, including the role and responsibility of regulators. Opportunities and threats are outlined, so that the reader is able to draw an opinion about these modern financial instruments. This study begins with a general introduction to the credit derivatives market and gives arguments for the growth catalysts which have driven the development to the current state. The financial participants in this market are presented as well. A comparison between market risk and credit risk follows to show the clear transition that helped credit risk to become an asset class. After that, a link to the recent Basel II guidelines is established in order to show the policies that banks have to consider when trading with credit risk. Chapter 2 deals with the historical evolution of credit derivatives and classifies different structures. A presentation of the main types of credit derivatives and their contract elements follow; these are mainly credit default swaps (CDS) and collaterized debt obligations (CDO). Chapter 2 also deals with definitions of a credit event and the calculation of risk premiums. Forms of default payment illustrate the possible settlement of a credit derivative contract. Afterwards, an account of the International Swaps and Derivatives Association (ISDA) is presented. This association serves as a supplier of standardized documentation to all market participants and facilitates transactions. Chapter 3 is the key element of this thesis and shows the applications of credit derivatives: [...]

Autoren/Hrsg.

Seemann, Harald

Inhaltsverzeichnis

1;Applications of Credit Derivatives;1
2;Table of Contents;3
3;Illustration Index;5
4;Table Index;6
5;Abbreviation Index;7
6;1. Current Issue;8
6.1;1.1. Purpose of the thesis;10
6.2;1.2. Structure of the thesis;11
7;2. Credit Risk Management - Foundations;12
7.1;2.1. Credit Risk versus Market Risk;12
7.2;2.2. Impacts of Basel II;13
7.3;2.3. Classification and Evolution of Credit Derivatives;14
7.4;2.4. Main Types of Credit Derivatives;16
7.4.1;2.4.1. Total Return Swap;17
7.4.2;2.4.2. Credit Default Swap;18
7.4.3;2.4.3. Credit Linked Notes – Rationale;20
7.5;2.5. Contract Characteristics;25
7.5.1;2.5.1. Reference Asset;25
7.5.2;2.5.2. Risk Premium;26
7.5.3;2.5.3. Credit Event;27
7.5.4;2.5.4. Recovery Rate;30
7.5.5;2.5.5. Forms of Default Payment;33
7.6;2.6. Standardized Documentation;34
7.6.1;2.6.1. International Swaps and Derivatives Association;34
7.7;2.7. Succession of CDS Reference Entities;36
8;3. Applications of Credit Derivatives;38
8.1;3.1. Portfolio Diversification;38
8.2;3.2. Short Positioning;38
8.3;3.3. Concentration Risk;39
8.4;3.4. Hedging;44
8.4.1;3.4.1. Distressed Buyer;44
8.4.2;3.4.2. Vendor Financing;45
8.4.3;3.4.3. Leasing Exposure;46
8.4.4;3.4.4. Managing Funding Cost Risk;47
8.4.5;3.4.5. Synthetic Debt Repurchase;49
8.5;3.5. Basics of Target Profiles;50
8.5.1;3.5.1. Cash Bonds versus Synthetic Securitization;50
8.6;3.6. Regulatory Arbitrage;51
9;4. Pricing of Credit Derivatives;54
9.1;4.1. Firm Value Model;55
9.1.1;4.1.1. Valuation Approach;56
9.1.2;4.1.2. Advantages and Disadvantages of the Firm Value Model;60
9.1.3;4.1.3. Moody’s KMV Risk Management Tools today;61
9.1.4;4.1.4. Equity Prices and Bankruptcy;62
9.2;4.2. Market Pricing Model for Credit Correlation Products;63
9.2.1;4.2.1. 100% Credit Default Correlation - Scenario 1;66
9.2.2;4.2.2. -100% Credit Default Correlation - Scenario 2;67
9.2.3;4.2.3. 0% Credit Default Correlation - Scenario 3;68
9.2.4;4.2.4. Findings from Default Correlation Analysis;69
9.3;4.3. Credit Rating Transition Models;70
9.3.1;4.3.1. Valuation Approach;70
10;5. Evaluation of Credit Derivatives;74
10.1;5.1. Opportunities and Risks involved in Credit Derivatives;74
10.2;5.2. Role and Responsibility of Regulators;78
10.3;5.3. Credit Derivatives in the Global Credit Markets;79
11;Bibliography;81
12;Appendices;86