Preface to the First Edition.
Preface to the Second Edition.
Acknowledgements.
Disclaimer.
Table of Spreadsheet Examples and Software.
About the Author.
PART I CREDIT BACKGROUND AND CREDIT DERIVATIVES.
1 Credit Debt and Other Traditional Credit Instruments.
1.1 Bonds and Loans; Libor Rates and Swaps; 'REPO' and General Collateral Rates.
1.2 Credit Debt Versus 'Risk-Free' Debt.
1.3 Issue Documents, Seniority and the Recovery Process.
1.4 Valuation, Yield and Spread.
1.5 Buying Risk.
1.6 Marking to Market, Marking to Model and Reserves.
1.7 The ‘Credit Crunch’ and Correlation.
1.8 Parties Involved in the Credit Markets and Key Terminology.
2 Default and Recovery Data; Transition Matrices; Historical Pricing.
2.1 Recovery: Ultimate and Market-Value-Based Recovery.
2.2 Default Rates: Rating and Other Factors.
2.3 Transition Matrices.
2.4 'Measures' and Transition Matrix-Based Pricing.
2.5 Spread Jumps and Spread Volatility Derived from Transition Matrices.
2.6 Adjusting Transition Matrices.
3 Asset Swaps and Asset Swap Spread; z-Spread.
3.1 'Par–Par' Asset Swap Contracts.
3.2 Asset Swap Spread.
3.3 Maturity and z-Spread.
3.4 Callable Asset Swaps; 'Perfect' Asset Swaps.
3.5 A Bond Spread Model.
4 Liquidity, the Credit Pyramid and Market Data.
4.1 Bond Liquidity.
4.2 The Credit Pyramid.
4.3 Engineered and Survey Data.
4.4 Spread and Rating.
5 Traditional Counterparty Risk Management.
5.1 Vetting.
5.2 Collateralisation and Netting.
5.3 Additional Counterparty Requirements for Credit Derivative Counterparties.
5.4 Internal Capital Charge.
6 Credit Portfolios and Portfolio Risk.
6.1 VaR and counterpartyVaR.
6.2 Distribution of Forward Values of a Credit Bond.
6.3 Correlation and the Multi-Factor Normal (Gaussian) Distribution.
6.4 Correlation and the Correlation Matrix.
7 Introduction to Credit Derivatives.
7.1 Products and Users.
7.2 Market Participants and Market Growth.
PART II CREDIT DEFAULT SWAPS AND OTHER SINGLE NAME PRODUCTS.
8 Credit Default Swaps; Product Description and Simple Applications.
8.1 CDS Product Definition.
8.2 Documentation.
8.3 Credit Triggers for Credit Derivatives.
8.4 CDS Applications and Elementary Strategies.
8.5 Counterparty Risk: PFE for CDS.
8.6 CDS Trading Desk.
8.7 CDS Contract and Convention Changes 2009.
9 Valuation and Risk: Basic Concepts and the Default and Recovery Model.
9.1 The Fundamental Credit Arbitrage – Repo Cost.
9.2 Default and Recovery Model; Claim Amount.
9.3 Deterministic Default Rate Model.
9.4 Stochastic Default Rate Model; Hazard and Pseudo-Hazard Rates.
9.5 Calibration to Market Data.
9.6 CDS Data/Sources.
9.7 Model Errors and Tests.
9.8 CDS Risk Factors; Reserves and Model Risk.
10 CDS Deal Examples.
10.1 A CDS Hedged Against Another CDS.
10.2 Introduction to Bond Hedging.
10.3 Hedge and Credit Event Examples.
11 CDS/Bond Basis Trading.
11.1 Bond Versus CDS: Liquidity.
11.2 Bond Repo Cost.
11.3 Bond Spread Measurement – z-Spread not Asset Swap Spread.
11.4 Bond Price Impact.
11.5 Embedded Options in Bonds and Loans.
11.6 Delivery Option in CDSs.
11.7 Payoff of Par.
11.8 Trigger Event Differences.
11.9 Embedded Repo Option.
11.10 Putting it All Together.
12 Forward CDS; Back-to-Back CDS, Mark to Market and CDS Unwind.
12.1 Forward CDS.
12.2 Mark-to-Market and Back-to-Back CDS.
12.3 Unwind Calculation; Off-Market Trade Valuation and Hedging.
12.4 'Double-Trigger CDS'.
13 Credit-Linked Notes.
13.1 CLN Set-Up; Counterparty or Collateral Risk.
13.2 Embedded Swaps and Options.
13.3 Costs.
13.4 Applications.
13.5 CLN Pricing.
13.6 Capital Guaranteed Note.
14 Digital or 'Fixed Recovery' CDS.
14.1 Product Description.
14.2 Pricing, Hedging, Valuation and Risk Calculations.
14.3 Trigger Event Differences.
15 Spread Options, Callable/Puttable Bonds, Callable Asset Swaps, Callable Default Swaps.
15.1 Product Definitions.
15.2 Model Alternatives and a Stochastic Default Rate Model for Spread Option Pricing.
15.3 Sensitivities and Hedging.
16 Total Return Swaps.
16.1 Product Definition and Examples.
16.2 Applications.
16.3 Hedging and Valuation.
17 Single Name Book Management.
17.1 Risk Aggregation.
17.2 CreditVaR for CDSs.
18 CDS and Simulation.
18.1 The Poisson Model and Default Times.
18.2 Valuation by Monte Carlo Simulation.
18.3 Sensitivity.
PART III PORTFOLIO PRODUCTS.
19 Portfolio Product Types.
19.1 Nth-to-Default Baskets.
19.2 'Synthetic' CDOs.
19.3 Cashflow CDOs.
19.4 Credit Securitisations.
19.5 Rating.
19.6 Alternative Levered Credit Portfolio Products.
20 The Normal Copula and Correlation.
20.1 Default Time Correlation.
20.2 Normal Copula.
20.3 Correlation.
21 Correlation in Practice.
21.1 Tranche Correlation.
21.2 Base Correlation.
21.3 Correlated Recoveries.
21.4 Correlation Regime Change and Other Modelling Approaches.
22 Valuation and Hedging.
22.1 Valuation Examples.
22.2 Sensitivity Calculation and Hedging.
22.3 Pricing More Complex Structures.
22.4 Model Errors and Tests; Alternative Models.
23 Alternative Copulas.
23.1 Student’s t-Distribution.
23.2 Copulas in General.
23.3 Archimedean Copulas: Clayton, Gumbel.
23.4 Clayton at θ = 0 and θ = ∞.
23.5 Model Risk.
24 Correlation Portfolio Management.
24.1 Static and Dynamic Hedges.
24.2 Correlation Book Management.
24.3 CreditVaR and CounterpartyVaR.
PART IV DEFAULT SWAPS INCLUDING COUNTERPARTY RISK.
25 Single Name CDS.
25.1 Non-Correlated Counterparty.
25.2 100% Correlation.
25.3 Correlated Counterparty: Pricing and Hedging.
25.4 Choice of Copula.
25.5 Collateralised Deals and CDS Book Management.
26 Counterparty CDSs.
26.1 Pricing.
26.2 Counterparty CDS (CCDS) Book Management.
PART V SYSTEMS IMPLEMENTATION AND TESTING.
27 Mathematical Model and Systems Validation.
27.1 Testing Procedures.
27.2 Implementation and Documentation.
28 System Implementation.
28.1 Anatomy of a CDO.
28.2 Management.
28.3 Valuation.
28.4 IT Considerations.
PART VI THE CREDIT CRISIS.
29 Cause and Effect: Credit Derivatives and the Crisis of 2007.
29.1 The Credit Markets Pre-Crisis.
29.2 The Events of MID-2007.
29.3 Issues to be Addressed.
29.4 Market Clearing Mechanisms.
Appendix Markit Credit and Loan Indices.
References.
Index.
