Valuation and Credit Risk Management
A comprehensive survey of credit risk modeling, valuation and credit risk management techniques.
This course is a component of the Advanced Credit Risk Professional Certificate.
CPE Credits: 21
Prerequisite knowledge:
- Intermediate MS Excel skills
- Basic fixed income arithmetic
- Elementary differential calculus
- Basic probability and statistics
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Module 1: Introduction
- What is credit risk?
- A look at the data: defaults, recoveries, spreads and cycles
- Conceptual approaches to credit risk modelling: actuarial (objective) models vs 'risk-neutral' or valuation models
Module 2: Single Issuer Credit Risk: Credit Transition Models
- Credit transition models
- Commercial implementations: Credit Metrics and the rating agencies
Module 3: Single Issuer Credit Risk: Structural Models
- Debt and equity as options on the assets of the firm
- Probability of default (PD) and loss given default (LGD)
- Expected credit loss is the value of a put option
- Credit spreads in structural models
- Bond risk measures in structural models
- Commercial implementations: Moody's Analytics (MKMV) and Credit Grades
- Rational ('strategic') default in structural models: subprime mortgages and securitization
Module 1: Single Issuer Credit Risk: Reduced Form Models
- Extracting (risk-neutral) default probabilities form bond prices
- Hazard rate models of default
- Credit spreads in reduced form models
- Bond risk measures in reduced form models
- A simple default time simulation for a stochastic hazard rate
Module 2: Single Issuer Credit Derivatives
- Total return swaps
- Asset swaps
- Credit default swaps
- Digital CDS
- Simple trader arithmetic for quick thinking on the trading desk
Module 1: Portfolio Credit Risk: Correlated Defaults
- Correlated firm value (structural models)
- Correlated intensities (reduced form models)
- Factor models
- Copula functions
Module 2: Value at Risk for Credit Portfolios
- The large homogeneous portfolio (LHP) approximation
- Transition VaR model: Credit Risk +
- Credit VaR by Monte Carlo: Copula Models and Factor Models
Module 3: Capital Allocation for Credit Risk
- VaR based risk capital
- Option theoretic approach to risk capital
- Regulatory Capital
- RAROC based capital budgeting