Credit Derivatives: Structuring, Pricing and Hedging

2-3 days, depending on objectives and content

SUBJECT FOCUS AND CONTENT

Part I: Conceptual Framework

·       Traditional analysis of credit risk, its measurement and pricing.  Role of rating agencies in the assessment of credit risk, default probability and expected recovery value.  Brief overview of probability theory and correlation analysis, and their use in measuring the risk and consequences of default on individual- and multiple-issuer portfolios.

·       Measurement of credit exposure under derivative instruments.  Maximum possible loss v/s expected loss.  Correlation analysis as a mitigant or exacerbating factor of the underlying exposure.

·       Extensive overview of regulatory capital framework for banks under BIS rules, including rules for the banking book and the trading book.  Efficient usage of available equity capital and the opportunities for regulatory capital optimization.  Comparison of economic v. regulatory capital requirements.

Part II: “First Generation” Solutions and their Limitations

·       Summary overview of principal instruments available in today’s marketplace, including funded and unfunded alternatives.  Credit swaps on single-obligor risks; credit-linked notes and deposits; total return swaps; “balance sheet” investments; spread options.

·       User-friendly discussion of pricing methodology for corporate bond, credit-default swap and total return swap.

·       Examination of regulatory capital rules for the treatment of basic credit derivatives in the banking and trading book, including a comparison of international differences.

·       Review of the standard ISDA credit default swap confirmation and the related definitions, including a discussion of well-publicized legal/documentation problems that have arisen in the past.

Part III.  “Second Generation” Solutions

·       Examination of “second generation” instruments including convertibility/transferability options; sovereign-linked notes and deposits; first-to-default and second-to default instruments; credit/total return swaps by companies on their own securities; recovery-value based instruments; capital-enhancing instruments; and credit swaps relating to counterparty exposure under an identified derivative contract (eg. gold-linked default swap.)

Part IV.  “Portfolio” Solutions and Securitizations

·       Detailed analysis of cash and synthetic CLOs and CBOs and the pros and cons of each structure, including Glacier, Bistro, C*Star, and Cast.  Discussion of relevant issues from accounting, regulatory, legal and cost perspective.

·       Review of recent US pronouncements on the treatment of synthetic structures under US federal regulations.

TARGET AUDIENCE

Traders, product specialists, research analysts, and risk managers who must have a detailed understanding of the structure and use of credit derivatives.

PARTICIPANT OBJECTIVES

As a result of this workshop, participants will:

·       Acquire a thorough understanding of the mechanics and pricing of credit derivatives, and the regulatory, accounting and rating agency considerations that are driving the growth of the market.

·       Increase their understanding of a bank’s economic and regulatory capital framework and the techniques available for optimizing the use of such capital.

·       Become comfortable with the latest technologies and products in the credit derivatives markets, from both the issuer and the investor’s perspectives.

METHODOLOGY

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