Active Credit Portfolio Management A Practical Guide to Credit Risk Management Strategies

Foreword.

Introduction and Acknowledgements.

Part I Markets.

1 Market Structure.

1.1 Market Development.

1.2 Market Participants.

1.3 Issuing Debt from a Company’s Viewpoint.

1.4 Ratings and Rating Agencies.

1.5 Credit Classes.

2 Instruments.

2.1 Straight Bonds.

2.2 Bonds with Embedded Options.

2.3 Exotics.

2.4 Hybrid Bank Capital.

2.5 Single-Name Credit Derivatives.

2.6 Portfolio Credit Derivatives.

2.7 Outlook on Product Development.

3 Company and Debt Instrument Analysis.

3.1 Sovereign Risk and Government Support.

3.2 Business Risk.

3.3 Financial Risk.

3.4 The Rating Agencies’ Methodology.

3.5 Evaluation of Specific Debt Instruments.

3.6 Recovery Rate Estimates.

4 The Economics of Credit Spreads.

4.1 Macro Drivers.

4.2 Micro Drivers.

4.3 Credit Quality.

4.4 Equity–Debt Linkage.

4.5 Market Technicals.

Part II Models.

5 Fixed Income Basics.

5.1 Basic Valuation Concepts.

5.2 Obtaining the Term Structure of Interest Rates.

5.3 The Yield to Maturity.

5.4 Measurement of Interest Rate Risk.

6 Spread Measures.

6.1 Basic Considerations.

6.2 Yield Spreads.

6.3 Z-Spreads.

6.4 Asset Swap Spreads.

6.5 Spread Measures for Floaters.

6.6 Spreads and the Real Economy.

6.7 Conclusion.

7 Basics of Credit Risk Models.

7.1 The Components of Credit Risk.

7.2 A Single-Step, Two-Stage Model.

7.3 A Multi-Step Model for Zero Coupon Bonds.

7.4 The Multi-Step Model.

7.5 Continuous-Time Approach.

7.6 Recovery Treatment.

7.7 The Term Structure of Credit Spreads.

8 Single-Name Models.

8.1 Reduced-Form Models.

8.2 Structural Models.

8.3 Rating-Based Transition Matrix Models.

9 Portfolio Models.

9.1 The Loss Distribution and its Impact on Portfolio Derivatives.

9.2 Independent Defaults.

9.3 Default Dependency.

9.4 Term-Structure Effects.

9.5 Valuing First-to-Default Baskets.

9.6 Valuing CDO Tranches with the HLPGC Model.

9.7 Spread Dispersion.

9.8 Price Discovery versus Model Competition.

10 Valuation of Credit Derivatives.

10.1 Credit Default Swaps.

10.2 Options on Credit-Risky Instruments.

10.3 CDS Indices.

10.4 nth-to-Default Baskets.

10.5 Collateralized Debt Obligations.

10.6 Exotic Derivatives.

11 Portfolio Risk Measurement.

11.1 Risk Measures.

11.2 Credit Portfolio Models.

Part III Management.

12 Principles of Credit Portfolio Management.

12.1 The Role of ACPM in the Asset Allocation Process.

12.2 Management Styles: Passive or Active.

12.3 Quantitative and Fundamental Credit Research.

12.4 Diversification in Credit Portfolios.

12.5 Credit Risk Management in an ALM Environment.

12.6 Credits in the Global Asset Allocation.

12.7 Building Blocks of Credit Portfolio Management.

12.8 Key Portfolio Figures.

13 Portfolio Allocation.

13.1 Indices.

13.2 Sector Allocation in a Markowitz Framework.

13.3 Quality Allocation.

13.4 Tools to Derive the Optimal Allocation.

14 Performance Measures.

14.1 Tracking Error.

14.2 Sharpe Ratio and Treynor Ratio.

14.3 Information Ratio.

14.4 Summary.

15 Performance Analysis.

15.1 Return Accumulation.

15.2 Return Attribution Analysis.

16 Hedging Credit Risk.

16.1 Hedging on a Single-Name Level.

16.2 Hedging on a Portfolio Level.

17 Trading Strategies.

17.1 Trading Cash Bonds.

17.2 Trading Strategies with Single-Name CDS.

17.3 Portfolio Derivatives Trades.

17.4 Spread Options: Single and Complex Strategies.

17.5 CPPI Strategies Including iTraxx Indices.

17.6 Correlation Trading.

17.7 Capital Structure Arbitrage Trades.

17.8 Recovery Trades.

17.9 EDS versus CDS and the Role of DDS.

17.10 CDS–Cash–Repo Arbitrage.

18 Operational Issues: Accounting.

18.1 An Introduction to IAS 39.

18.2 IAS 39 Accounting for Credit Instruments.

19 Operational Issues: Basel II.

19.1 An Introduction to Basel II.

19.2 Basel II for Credit Instruments.

Part IV Appendix.

A.1 Analytics with Bloomberg and Reuters.

A.2 Default and Recovery Data from Rating Agencies.

References.

Index.