Credit Derivatives Handbook: Global Perspectives, Innovations, and Market Drivers

by Gregoriou, Greg; Ali, Paul

• ISBN13: 9780071549523
• ISBN10: 0071549528
• Edition: 1st
• Format: Hardcover
• Copyright: 2008-07-23
• Publisher: McGraw-Hill Education

Summary

The world's leading financial thinkers share their insights into the latest developments in credit derivativesIn The Credit Derivatives Handbook, some of the world's sharpest financial and legal minds come together to discuss how credit derivatives have evolved from tools restricted to the banking industry into flexible and customizable instruments used by investors of all kinds.You will come away with the knowledge and insight needed to measure and value risk, as well as the ability to put credit derivatives to work. Over fifteen contributors provide in-depth analyses of subjects in their respective areas of expertise, such as: Key products, applications, and typical trades, hedging and credit structuring Pricing of credit default swaps and synthetic CDOs Design of synthetic CDOs Copula models, with illustrative examples Credit derivatives in investment portfolios Opportunities for structuring credit derivatives in accordance with Islamic financeComprehensive in scope but executed in meticulous detail,The Credit Derivatives Handbookprovides a complete, global perspective of what the editors consider "one of the most important financial innovations of recent times."

Author Biography

Greg N. Gregoriou is Professor of Finance in theSchool of Business and Economics at State University of New York.

Paul Ali is an Associate Professorin the Faculty of Law, University of Melbourne.

Table of Contents

Acknowledgments	p. xi
Editors	p. xiii
Contributors	p. xv
Innovations in Credit Default Swaps
The Changing Face of Credit Default Swaps	p. 3
Introduction	p. 3
Credit Default Swaps	p. 4
References	p. 12
Derivatives in Islamic Finance	p. 15
Introduction	p. 16
Types of Islamic Finance	p. 17
Implicit Derivatives: Identification and Evaluation	p. 22
Islamic Finance and Structured Finance	p. 31
Explicit Derivatives in Islamic Structured Finance: Credit Risk Transfer	p. 33
Assessment of Derivatives in Islamic Finance	p. 37
Conclusion: The Prospects of Islamic Derivatives	p. 43
Acknowledgments	p. 45
References	p. 45
Credit Derivatives and the Resolution of Financial Distress	p. 47
Introduction	p. 47
Chapter 11 Today	p. 48
Credit Derivatives and the Prebankruptcy Period	p. 49
Credit Derivatives in Chapter 11	p. 52
Conclusion	p. 55
References	p. 55
Asymmetric Information and Opacity in Credit Derivatives Markets	p. 57
Introduction	p. 57
Related Literature	p. 60
The Model	p. 62
Asymmetric Information	p. 65
A Simple Model with Moral Hazard and Adverse Selection	p. 68
Conclusion	p. 70
Appendix	p. 71
References	p. 75
The Role of Macro and Country-Specific Factors on the Use of Credit Derivatives: Sovereign Credit Default Swap Market	p. 77
Introduction	p. 77
Credit Derivatives: A Brief Overview	p. 78
An Emerging Market Overview: Turkey	p. 82
Data and Methodology	p. 85
Estimation Results	p. 87
Conclusion	p. 89
References	p. 90
Pricing Credit Default Swaps
Pricing Credit Derivatives with a Copula-Based Actuarial Model for Credit Risk	p. 95
Introduction	p. 95
The Model for Default and Credit Migration	p. 97
Credit Derivatives	p. 104
Conclusion	p. 116
References	p. 117
Asset Dynamics Estimation and Its Impact on CDS Pricing	p. 121
Introduction	p. 122
No-Arbitrage Pricing of CDS	p. 123
The Structural Model of Credit Risk	p. 125
Estimation of Asset Value Dynamics	p. 127
Empirical Impact	p. 129
Analysis of the Pricing Error	p. 136
Conclusion	p. 140
References	p. 141
A Unified Approach to the Theory of Default Risk and Credit Derivatives	p. 143
Introduction	p. 143
A Simple Model of Credit Risk	p. 145
Normal Events and Rare Events	p. 147
The Poisson Distribution	p. 149
Credit Risk in the Framework of the B&S Differential Equation	p. 150
The Merton Model and its Extensions	p. 151
Dynamic Modeling of the Probability of Default: The Probabilities of Transition	p. 163
Credit Derivatives	p. 169
Other Approaches to Credit Risk	p. 178
Conclusion	p. 178
References	p. 179
Investigating the Link between Credit Default Swap Spreads and the U.S. Financial Market	p. 183
Introduction	p. 183
Data Set	p. 185
Econometric Study	p. 189
Investigating a Joint Evolution	p. 194
Linear Framework	p. 194
Conclusion	p. 198
References	p. 198
Design and Pricing of Collateralized Debt Obligations
Design of Collateralized Debt Obligations: The Impact of Target Ratings on the First Loss Piece	p. 203
Introduction	p. 203
Collateralized Debt Obligations	p. 204
Information Asymmetries in CDO Transactions	p. 212
Portfolio Construction and the Size of the First Loss Piece	p. 217
Conclusion	p. 226
References	p. 226
On the Pricing of Collateralized Debt Obligations	p. 229
Introduction	p. 229
Portfolio Credit Derivatives	p. 231
Model and Applications	p. 235
Conclusion	p. 246
Appendix	p. 246
References	p. 257
Pricing Forward-Starting Collateralized Debt Obligations Using Dynamic Copula Processes	p. 259
Introduction	p. 260
Archimedean Copulas within the Credit Framework	p. 263
Dynamic Copulas from a Levy Process Perspective	p. 268
Dynamic Copulas Based on Gamma-OU Process	p. 273
Comparing the Two Dynamic Copula Models	p. 278
Conclusion	p. 278
	p. 282
Simulating the Gamma-OU Process	p. 285
References	p. 286
Identifying Systemic and Idiosyncratic Risk from Standardized Single-Tranche Collateralized Debt Obligations	p. 289
Introduction	p. 289
A Brief Primer on CDOs	p. 291
Default Probability and Default Correlation in STCDOs	p. 294
Idiosyncratic and Systemic Risk in STCDO Tranches	p. 297
Data and Empirical Framework	p. 297
Results	p. 299
Conclusion	p. 301
References	p. 302
Default Contagion in Large Homogeneous Portfolios	p. 303
Introduction	p. 304
Intensity-Based Models in a Homogeneous Model Reinterpreted as Markov Jump Processes	p. 305
Using the Matrix-Analytic Approach to Find Multivariate Default Distributions and Related Quantities	p. 306
Calibrating the Model Parameters against CDO Tranche Spreads, Index CDS Spreads, and Average CDS Spreads	p. 316
Numerical Studies	p. 320
Conclusion	p. 330
Acknowledgments	p. 332
References	p. 332
Asset Allocation and Credit Derivatives
An Asset Allocation Problem with Credit Derivatives	p. 337
Introduction	p. 337
The Model	p. 339
The Optimal Portfolio	p. 348
Conclusion	p. 355
Appendix	p. 355
References	p. 358
Synthetic Collateralized-Debt-Obligation-Squared Pricing Methodologies	p. 361
Introduction	p. 362
Synthetic CDO-Squared Structures	p. 364
Synthetic CDO-Squared Pricing	p. 365
Conclusion	p. 374
References	p. 376
The Role of Credit and Credit Index Derivatives in Portfolio Management: Asset Allocation Issues and Opportunities	p. 379
Introduction	p. 379
Credit Market Performance	p. 380
The Role of Riskier Credit in Investment Portfolios	p. 383
Using Index Derivatives to Alter Portfolio Asymmetry Properties	p. 385
Allocation via Active Rules	p. 389
Conclusion	p. 393
References	p. 393
Index	p. 397
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