37281 - Credit Derivatives

Learning outcomes

At the end of the course the student knows how to transfer credit risk by means of swap arrangements (asset swaps and TRORS), and with credit derivatives. The students knows the analysis developed both on a single name basis (CDS) and on a multiname basis (CDO, CDX, iTraxx). The analysis is extended to large CDO, ABS and ABX.

Course contents

Introduction to Credit Risk Theory (Defaultable bonds, credit spread, recovery rate, seniority rules,

credit rating)

Structural models for credit risk. The seminal model of Merton (1974). Further developments:

Black and Cox (1976), Geske (1977), Leland (1994).

Some industry applications: KMV, CreditMetrics.

Structural models for sovereign risk.

Drawbacks of the structural approach.

The reduced-form approach.

The incomplete information model of Duffie and Lando (2001)

Credit derivatives. Credit Default Swap valuation. Vasicek model. Copula methods.  Basket CDS. CDOs.

Readings/Bibliography

References

Merton R. C., On the pricing of corporate debt: the risk structure of interest rates, Journal of Finance (1974), vol.29, n.2, 449-470

Black F. and J.C. Cox , Valuing corporate securities: some effects of bond indenture Provisions, Journal of Finance (1976), 31, 351-367

Leland H. E., Corporate debt value, bond covenants, and optimal capital structure, Journal of Finance (1994), 49, 1213-1252

Saunders A. and L. Allen “Credit risk measurement” (2002), Wiley Finance, New York

Bielecki T. R. and M. Rutkowski “Credit Risk: Modeling, Valuation and Hedging” (2004), Springer Verlag, Berlin Heidelberg

Assessment methods

Written exam.

Office hours

See the website of Rossella Agliardi