Introduction to Credit Risk

Stanley Myint and Fabrice Famery

Contents

Foreword

Introduction

1.

Theory and Practice of Corporate Risk Management

2.

Theory and Practice of Optimal Capital Structure

3.

Introduction to Funding and Capital Structure

4.

How to Obtain a Credit Rating

5.

Refinancing Risk and Optimal Debt Maturity

6.

Optimal Cash Position

7.

Optimal Leverage

8.

Introduction to Interest Rate and Inflation Risks

9.

How to Develop an Interest Rate Risk Management Policy

10.

How to Improve Your Fixed-Floating Mix and Duration

11.

Interest Rates: The Most Efficient Hedging Product

12.

Do You Need Inflation-linked Debt?

13.

Prehedging Interest Rate Risk

14.

Pension Fund Asset and Liability Management

15.

Introduction to Currency Risk

16.

How to Develop Currency Risk Management Policy

17.

Translation or Transaction: Netting Currency Risks

18.

Early Warning Signals

19.

How to Hedge High Carry Currencies

20.

Currency Risk on Covenants

21.

Optimal Currency Composition of Debt 1: Protect Book Value

22.

Optimal Currency Composition of Debt 2: Protect Leverage

23.

Cyclicality of Currencies and Use of Options to Manage Credit Utilisation

24.

Managing the Depegging Risk

25.

Currency Risk in Luxury Goods

26.

Introduction to Credit Risk

27.

Counterparty Risk Methodology

28.

Counterparty Risk Protection

29.

Optimal Deposit Composition

30.

Prehedging Credit Risk

31.

xVA Optimisation

32.

Introduction to M&A-related Risks

33.

Risk Management for M&A

34.

Deal-contingent Hedging

35.

Introduction to Commodity Risk

36.

Managing Commodity-linked Revenues and Currency Risk

37.

Managing Commodity-linked Costs and Currency Risk

38.

Commodity Input and Resulting Currency Risk

39.

Offsetting Carbon Emissions

40.

Introduction to Equity Risk

41.

Hedging Dilution Risk

42.

Hedging Deferred Compensation

43.

Stake-building

Credit risk is the risk that one counterparty defaults on its payments to the other. The payments can be any kind of payable, including coupons and principal on debt, derivative payments or payments not linked to financial transactions – for example, payments for a delivery of a commodity or equipment.

Credit risk is a key risk for financial institutions due to their role as credit providers to the economy. However, here we focus on the credit risk of non-financial companies due to their bank exposures, which normally manifests itself in one of three ways:

    • a counterparty risk on deposits, ie, the risk of default of the bank with whom the company has deposited money; and

    • a counterparty risk on derivatives positions, ie, risk that the bank with whom the company has entered into a derivative position will default, which would expose the company to the risk of unwinding or replacing the derivative;

    • the company’s own cost of credit, which impacts the refinancing cost of the company, and the credit charges that lenders apply to derivative transactions (xVA).

We shall cover each kind of risk in turn in the five chapters that follow in this part of

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