O'Kane Credit Risk Seminar: Pricing and Risk-Managing Credit Derivatives
15-16 May, 2008 - The Dorchester, LondonCourse Contents
Day 1:
The first day of the seminar introduces credit risk and single-name credit derivatives modelling, reviews the asset swap, and thoroughly explores the workings, risk analysis, pricing, and hedging of the credit default swap, reflecting its importance as the building block of the other credit derivatives. Options on CDS and constant maturity default swaps are also examined. The day closes with an examination of CDS indices, the multi-name credit derivatives which have dramatically reshaped the credit markets, and discusses their extension to subprime and asset-backed securities.
The first day of the seminar addresses such issues as:
Who uses which credit derivatives and why?
What are the interest rate and default risks of an asset swap?
How exactly do credit default swaps work?
What models should be used to price default swaps? How to calibrate them?
How to hedge the credit and interest rate risks of CDS positions
How to model the counterparty risk of a CDS
How do options on credit default swaps work?
What is the risk profile of a constant maturity default swap and how to hedge it?
How does a CDS index work?
What is the relationship between the value of a CDS index and that of the underlying credit derivatives?
Programme:
► Introduction (90 minutes)
An overview of the credit derivatives market
Empirical analysis of credit risk
Structural models for credit risk
A reduced form modelling framework for single-name credit derivatives
► The asset swap (30 minutes)
The mechanics and pricing of the asset swap
Market risk and default risk of an asset swap
Mitigating the counterparty risk
► The credit default swap (180 minutes)
The credit default swap (CDS) contract
The pricing link between default swaps and bonds
Unwinding and valuation of a default swap contract
Calibration of the survival curve
Market risk a default swap contract
The counterparty risk of a default swap contract
Pricing and risk-managing forward starting default swaps
Extension of CDS to cover loans and asset-backed securities
► Options on default swaps (30 minutes)
The mechanics of options on default swaps
Uses of a default swap option
Pricing and hedging a default swap option
► Constant maturity default swap (30 minutes)
Mechanics of the constant maturity default swap (CMDS)
Uses of a CMDS
The risk sensitivities of a CMDS
The challenge of pricing a CMDS
Risk management of a CMDS
► CDS indices (60 minutes)
The mechanics of CDS indices such as CDX and iTraxx
Valuation and risk-management of CDS indices
Reconciling the value of the index with the value of the underlying CDS
Extension of CDS indices to sub-prime and asset-backed securities
Day 2:
The second day of the seminar reviews options on CDS indices and then delves into correlation products with specific emphasis on the mechanics, pricing and hedging of synthetic collateralised debt obligations and bespoke tranches. The seminar introduces the classic Gaussian copula pricing framework, sheds light on the correlation smile, and then extensively surveys the competing approaches to integrating the correlation smile, among them base correlation, copula-based skew models, and dynamic correlation models. The day concludes with a discussion of advanced multi-name products with emphasis on credit constant proportion debt obligations.
The second day of the seminar addresses such issues as:
How to price options on CDS indices
When to exercise an option on a CDS index
How to price and risk-manage synthetic CDOs
Why is there a correlation skew?
When to use base correlation and when to avoid it
How to use base correlation to price bespoke tranches
Can arbitrage arguments impose model bounds on the prices of synthetic CDOs?
Which copula models fit the correlation skew best?
When to use a dynamic correlation model
What is the market risk of a CPDO?
Programme:
► Options on CDS indices (60 minutes)
Mechanics and pricing of options on CDS indices
Extending Blacks model to pricing options on CDS indices
The risk-management of CDS index options
► Correlation products (120 minutes)
Default baskets
The mechanics of synthetic CDOs
The Gaussian copula model
Valuation of a synthetic CDO
Risk management of a synthetic CDO
► Modelling the risk of default dependency (30 minutes)
Copulas as a mathematical tool for dependency modelling
Rank correlation as a pure measure of dependency
Tail dependency as a measure of joint extremal events
► Correlation products and the skew (180 minutes)
The correlation smile or skew
Modelling the correlation skew using base correlation
No-arbitrage conditions for a correlation skew model
Pricing bespoke tranches using base correlation mapping approaches
Copula models for capturing the correlation skew
Dynamic correlation models top down versus bottom up
► Dynamic credit derivatives (30 minutes)
The mechanics of credit CPDOs
Market risk of credit CPDOs
O'Kane Credit Risk Seminar:
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