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Credit Event
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Credit Event
Default Rates
Credit Ratings
Historical Default Rates
Cumulative and Marginal Default Rates
Transition Probabilities
Predicting Default Probabilities
Recovery Rates
The Bankruptcy Process
Estimates of Recovery Rates
Assessing Corporate and Sovereign Rating
Corporate Default
Sovereign Default
Credit Ratings
Credit Ratings
Risk Premium
Credit Exposure
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Netting agreements
Credit Derivatives
Credit Derivatives
Credit Derivatives
Credit Derivatives
Bankruptcy
Credit Derivatives
securitization
Securitization
Securitization:
1. Pooled assets
2. Securities issued to investors the securities represent interests in the asset
pool.
Securitization
What can be securitized?
1. Any current or future cash flow that is generated by assets can be securitized.
2. Securitization market has grown and become more sophisticated
3. More and more asset types
4. Most common: mortgage loans, auto loans, credit card receivables, student
loans, equipment leases, aircraft
Sponsor: institution that starts the securitization. May not own the asset sold
in the securitization; may just advise.
The protection buyer views a basket swap as a lower cost method of hedging
multiple credits (or, in effect, providing an equity cushion to this part of its
portfolio). . FTD baskets can also be offered to investors in the form of
credit-linked notes (CLNs).
CDS Swaptions
Credit default swaptions are options to enter into a CDS contract at no cost,
with a given premium rate called the strike, paid with a single upfront
payment. An option to buy credit protection is called a payer swaption and an
option to sell credit protection is called a receiver swaption. Just as interest
rate swaptions provide protection against yield curve moves, a credit default
swaption protects against credit curve moves. But the key difference is that
for the latter, the underlying instrument may default before the swaption
maturity. In such a case there are three possibilities depending on the
contract:
If nothing is specified in the contract, the swaption can still be exercised
(which makes more sense with CDS indices because there is still a
remaining part even after the first default events).
The swaption can have an acceleration clause requiring the option to be
exercised immediately after a default.
The swaption can be knocked out or cancelled.
If the underlying instrument does not default before swaption maturity, the
final value will be:
Payer swaption: RPV01*.max(Swap Rate - Strike,0)
Receiver swaption: RPV01*.max(Strike - Swap Rate,0)
*RPV01i ,t = present value on day t of a 1 basis point stream of premia which terminates at maturity
or default, whichever occurs first. The calculation of RPV01i ,t requires a CDS pricing model.
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