Credit derivatives: the past, the present and the future
The determinants of credit spread returns
What’s driving the default swap basis?
What is the value of modified restructuring?
The debt and equity linkage and the valuation of credit derivatives
Nth to default swaps and notes: all about default correlation
Portfolio credit risk models
Credit derivatives as an efficient way of transitioning to optimal portfolios
Overview of the CDO market
Synthetic securitisation and structured portfolio credit derivatives
Integrating credit derivatives and securitisation technology: the collateralised synthetic obligation
CDOs of CDOs: art eating itself?
Extreme events and multi-name credit derivatives
Reduced-form models: curve construction and the pricing of credit swaps, options and hybrids
Modelling and hedging of default risk
ISDA’s role in the credit derivatives marketplace
Credit linked notes
Using guarantees and credit derivatives to reduce credit risk capital requirements under the New Basel Capital Accord
The key challenge in optimising credit-risky portfolios is measuring risk/return trade-off consistently with the pricing of overlaying instruments used for transition to an optimal portfolio. This chapter describes an original hybrid methodology that measures portfolio credit risk consistently with the pricing and hedging techniques. We construct an efficient frontier for the given portfolio, explicitly taking into consideration possible default events. Then we identify the optimal portfolio on the frontier that is the most appropriate for the nature of existing portfolio. Finally, we demonstrate how to overlay various credit derivatives structures in order to transform the current portfolio into the optimal one.
As discussed in the last chapter, the last decade has seen a number of methodologies for evaluating credit risk on a portfolio basis has greatly increased and now includes such well-known packages as KMV (see Kealhoffer, 1995), CreditPortfolioView (see Wilson, 1997), CreditRisk+ (see Credit Suisse Financial Products, 1997) and CreditMetrics (see CreditMetrics). This increase is the direct result of the development of credit derivatives markets. While credit