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Structured Credit Products: Credit Derivatives and Synthetic Securitisation, 2nd Edition

Book Description

Updated coverage of structured credit products with in-depth coverage of the latest developments

Structured credit products are one of today's fastest growing investment and risk management mechanisms, and a focus of innovation and creativity in the capital markets. The building blocks of these products are credit derivatives, which are among the most widely used products in finance. This book offers a succinct and focused description of the main credit derivative instruments, as well as the more complex products such as synthetic collateralized debt obligations. This new edition features updated case studies from Europe and Asia, the latest developments in synthetic structures, the impact of the subprime meltdown, and a CD-ROM of models and teaching aids.

Moorad Choudhry returns with this excellent update of the credit derivatives market. The second edition of his classic work is, like the subject matter itself, at the forefront of the financial industry. It deserves a wide readership.

—Dr Didier Joannas

Regional Director, Thomson Reuters, Hong Kong

This is the perfect companion for both experienced and entry level professionals working in the structured credit fraternity. It is an erudite, insightful and enjoyable read that successfully demystifies one of the most topical subject areas in banking today, while also providing important practical examples that link the theory to the job itself.

—Dr James Berriman

Global Pricing Unit, Royal Bank of Scotland

Moorad Choudhry has earned a deserved reputation from both academics and practitioners as one of the leading practical yet rigorous authors of finance books. In this Second Edition, his practical knowledge of credit derivatives keeps the audience engaged with straightforward explanations of complicated structures, and an accessible level of mathematical sophistication necessary to understand structured credit products. The author offers complete, rigorous analysis while avoiding overuse of mathematical formulas and carefully balanced practical and theoretical aspects of the subject. I strongly recommend this book for those wishing to gain an intuitive understanding of structured credit products, from practitioners to students of finance!

—Mohamoud Barre Dualeh

Senior Product Developer, Abu Dhabi Commercial Bank, UAE

This is THE book for credit derivative trading. From first steps to advanced trading strategies, this is invaluable. Well written and insightful, perfect for ad hoc reference or reading cover to cover.

—Andrew Benson

ETF Market Making, KBC Peel Hunt, London

Professor Choudhry has inspired me to really get into credit derivatives. It's great to be lectured by someone with such energy and practical hands-on experience, as well as the ability to get stuck into the details.

—George Whicheloe

Equity-Linked Technology, Merrill Lynch, London

Moorad Choudhry is Head of Treasury at Europe Arab Bank plc in London. He is a Visiting Professor at the Department of Economics at London Metropolitan University.

Note: The ebook version does not provide access to the companion files.

Table of Contents

  1. Cover
  2. Contents
  3. Title
  4. Copyright
  5. Dedication
  6. Foreword
  7. Preface
  8. Acknowledgements
  9. About the Author
  10. Prologue: The 2007–2008 Credit and Liquidity Crunch: Impact on Structured Credit Markets
  11. Part I: Credit Risk and Credit Derivative Instruments
    1. Chapter 1: Credit Risk
      1. Corporate Default
      2. Credit Risk
      3. Credit Ratings
      4. Formal Credit Ratings
      5. Ratings Changes Over Time
      6. Value-At-Risk (VAR)
      7. Explaining Value-At-Risk
      8. Variance–Covariance Value-At-Risk
      9. Credit Value-At-Risk
      10. Creditmetrics™
      11. Reference
    2. Chapter 2: Credit Derivatives I: Unfunded Instruments
      1. Market Volumes
      2. Credit Risk and Credit Derivatives
      3. Credit Derivative Instruments
      4. Credit Default Swaps
      5. Technical Features of CDS
      6. Basket Default Swaps
      7. Quanto Default Swaps
      8. Structured Finance Security CDS
      9. Asset Swaps
      10. Total Return Swaps
      11. Credit Options and Credit Spread Options
      12. The CDS Itraxx Index
      13. Bloomberg Screens
      14. Settlement
      15. Issues With The Settlement Mechanism
      16. Risks In Credit Default Swaps
      17. Impact of The 2007–08 Credit Crunch: New CDS Contracts and The CDS ‘Big Bang’
      18. Quick Cds Calculator
      19. CDS Index Screens
      20. Appendix 2.1 ISDA 2003 Credit Derivative Definitions
      21. Appendix 2.2 CDS Term Sheet
      22. Appendix 2.3 Total Return Swap and Repo
      23. Appendix 2.4 Basel Regulatory Capital Treatment and Credit Derivatives
      24. Appendix 2.5 Market-Implied Timing of Default From CDS Prices
      25. Reference
    3. Chapter 3: Credit Derivatives II: Funded Instruments
      1. Credit-Linked Notes
      2. Clns and Structured Products
      3. Principal Protected Structures
      4. Funded Total Return Swap
      5. The Portfolio CLN
      6. Static Portfolio CLN
    4. Chapter 4: Credit Analysis and Relative Value Measurement
      1. Credit Analysis
      2. Financial Analysis
      3. Industry-Specific Analysis
      4. Relative Value Analysis: Bond Spreads
      5. Reference
    5. Chapter 5: Credit Derivatives III: Applications
      1. Managing Credit Risk
      2. Basic Use of Credit Derivatives By Banks
      3. Applications of TRSS
      4. The TRS as Off-Balance Sheet Funding Tool
      5. Applications For Portfolio Managers
      6. Credit Derivatives and Relative Value Trading
      7. Bond Valuation From CDS Prices: Bloomberg Screen VCDS
    6. Chapter 6: Credit Derivatives Pricing and Valuation
      1. Introduction
      2. Pricing Models
      3. Credit Spread Modelling
      4. Credit Spread Products
      5. Total Return Swap (TRS) Pricing
      6. Credit Curves
      7. Appendix 6.1 Default Probabilities
      8. Reference
    7. Chapter 7: Credit Default Swap Pricing
      1. Theoretical Pricing Approach
      2. Market Pricing Approach
      3. Risk-Neutral Default Probability
      4. Credit Derivatives Pricing in Volatile Environments: ‘Upfront + Constant Spread’
      5. The Basis of Default Probabilities
      6. Description of Bloomberg Screen CDSW
      7. Appendix 7.1 The Marketa Pproach To CDS Pricing
      8. References
    8. Chapter 8: The Asset Swap—Credit Default Swap Basis I: The Asset Swap Pricing of Credit Default Swaps
      1. Introduction
      2. Asset Swap Pricing
      3. Illustration Using Bloomberg
      4. Reference
    9. Chapter 9: The Credit Default Swap Basis II: Analysing the Relationship Between Cash and Synthetic Markets
      1. The Asset Swap Price
      2. The CDS Basis
      3. Factors Driving The Basis
      4. The Dynamics of The CDS Basis
      5. Analysing The Spread Measure
      6. Analysing The Basis
      7. Adjusted Basis Calculation
      8. The Itraxx Index Basis
      9. Market Picture Post-Credit Crunch
      10. Conclusion
      11. Reference
    10. Chapter 10: Trading the Credit Default Swap Basis: Illustrating Positive and Negative Basis Arbitrage Trades
      1. Relative Value and Trading The Basis
      2. Factors Influencing The Basis Package
      3. Trade Examples
      4. A Credit Default Swap Relative Value Trade in Eu Aaa-Rated Sovereign Names
      5. Conclusion
      6. References
    11. Chapter 11: Syndicated Loans, Loan-Only Credit Default Swaps and CDS Legal Documentation
      1. Introduction
      2. Leveraged Loans and High-Yield Bonds Compared
      3. Standard Documentation For Single-Name LCDS and CDS
      4. References
  12. Part II: Structured Credit Products and Synthetic Securitisation
    1. Chapter 12: An Introduction to Securitisation
      1. The Concept of Securitisation
      2. Reasons For Undertaking Securitisation
      3. The Process of Securitisation
      4. Illustrating The Process of Securitisation
      5. ABS Structures: A Primer on Performance Metrics and Test Measures
      6. Securitisation Post-Credit Crunch
      7. Securitisation: Impact of The 2007–2008 Financial Crisis
      8. Conclusion
      9. Reference
    2. Chapter 13: Synthetic Collateralised Debt Obligations
      1. Securitisation and The Collateralised Debt Obligation
      2. The Synthetic CDO
      3. Assessing The Genesis of The Synthetic CDO
      4. Synthetic CDO Deal Structures
      5. The Managed Synthetic CDO
      6. The Single-Tranche Synthetic CDO
      7. Hypothetical Pricing Example
      8. Case Studies
      9. Liquidity, Defaults and Credit Rating: Interrelated Beasts During The Market Crisis of 2007
      10. Appendix 13.1 Hypothetical Deal Term Sheet
      11. Appendix 13.2 The Moody’s Diversity Score
      12. References
    3. Chapter 14: CDO Valuation and Cash Flow Waterfall Models
      1. Overview
      2. Valuation Approaches
      3. Valuation Using Default Probability and Correlation
      4. Pricing Methodology For Synthetic CDO Notes
      5. Parameter Sensitivities of Synthetic CDO Tranches
      6. CDO Note Pricing: Summary
      7. Hypothetical Case Study: Cash Flow Approach
      8. Cash Flow Waterfall Model: Static Synthetic CDO
    4. Chapter 15: Synthetic Conduits and Credit Derivative Funding Structures
      1. Commercial Paper Conduits
      2. Asset-Backed Commercial Paper
      3. Evolution of ABCP Programmes
      4. ABC Fund Limited
      5. Synthetic Repackaging Structures
      6. Example Deal Structure
      7. Synthetic Funding Structures
      8. CDS-Linked TRS Term Funding Structure
  13. Part III: CD-R
    1. Chapter 16: Files on the Accompanying CD-R
      1. CDO-Note: Synthetic CDO Note Pricing Model
      2. CDS Pricing Spreadsheet
      3. Diversity Score Spreadsheets
      4. Fitch Rating Agency Reports
      5. Static Synthetic CDO Cash Flow Waterfall Model
      6. Teaching Aids: Powerpoint Slides
  14. Contributing authors
  15. Afterword: Econometrics, finance and football . . .
  16. Glossary
  17. Index