The Fundamentals of Credit Risk and Its Derivatives

The Fundamentals of Credit Risk and Credit Derivatives

The training Fundamentals of Credit Risk and Credit Derivatives provides an essential introduction to financial instruments used to transfer and manage credit risk in the markets.

In a context where credit risk management is crucial for financial institutions, it is essential to understand the functioning and use of credit derivative products, whether you are an analyst, trader, risk manager, or finance professional.

This training covers fundamental concepts of credit derivatives, including Credit Default Swaps (CDS), CDS indices, Collateralized Debt Obligations (CDOs), and Credit Linked Notes (CLNs). You will learn to analyze credit spreads, understand pricing mechanisms, and measure the impact of systemic risk on these instruments.

Through a combination of theory and practical case studies, you will develop a deep understanding of the issues related to credit derivatives and be able to assess their role in risk management and investment strategy optimization.

Training Objectives

• Understand the credit derivatives ecosystem
• Identify different types of credit derivatives and their roles
• Familiarize with regulatory frameworks such as ISDA, Dodd-Frank, EMIR, and Basel
• Assess credit risk through rating agencies, credit spreads, and the CVA approach
• Master key credit derivatives such as CDS, TRS, CDS indices, CLNs, N-to-Default Swaps, and CDOs
• Understand pricing and valuation of credit derivatives, including pricing models and correlation/jump-to-default concepts
• Apply practical concepts using tools like Excel to evaluate the impact of correlation on CDO tranches

Target Audience

• Bankers and risk analysts
• Portfolio managers
• Traders and arbitrageurs
• Structurers and sales professionals
• Regulators and auditors
• Corporate and bank treasurers

Training Duration

• 2 days (14 hours)

The Fundamentals of Credit Risk and Credit Derivatives

I. General Overview

• Definition and role of credit derivatives
• The credit derivatives ecosystem: Hedgers, Investors, Traders, Arbitrageurs, Structurers
• Regulatory framework governing credit derivatives: ISDA, Dodd-Frank Act, EMIR, and Basel

II. Estimating Credit Risk

• Credit rating agencies and risk assessment
• Risky vs. risk-free bonds
• Z-spread and OIS spread
• Credit Value Adjustment (CVA) approach
• Asset swap spread

Practical Case:

Calculating CVA based on default probability assumptions using Excel

III. Key Credit Derivatives

• CDS and CDS Indices
• TRS and CLNs
• Nth-to-default and First-to-default swaps
• CDOs

Practical Cases:

• Analysis of news articles regarding the settlement of Russian CDS after the reference bond default
• Scenario analysis of CDS usage in arbitraging the risky yield curve

IV. Understanding Pricing and Valuation of Credit Derivatives

• The conceptual framework and assumptions for pricing credit derivatives
• The notion of no-arbitrage opportunities and risk-neutral probability
• Correlation and dependency structures
• The "Jump to Default" concept
• Deep dive into CDS pricing
• Understanding CDS settlement

Practical Cases:

• Analysis of the ISDA Master Agreement
• Understanding the impact of increasing correlation on relative CDO tranche pricing using Excel
• Analysis of the cheapest-to-deliver bond pricing mechanism through auction processes