Synopses & Reviews
The credit risk market is the fastest growing financial market in the world, attracting everyone from hedge funds to banks and insurance companies. Increasingly, professionals in corporate finance need to understand the workings of the credit risk market in order to successfully manage risk in their own organizations; in addition, some wish to move into the field on a full-time basis. Most books in the field, however, are either too academic for working professionals, or written for those who already possess extensive experience in the area. Credit Derivatives fills the gap, explaining the credit risk market clearly and simply, in language any working financial professional can understand. Harvard Business School faculty member George C. Chacko and his colleagues begin by explaining the underlying principles surrounding credit risk. Next, they systematically present today's leading methods and instruments for managing it. The authors introduce total return swaps, credit spread options, credit linked notes, and other instruments, demonstrating how each of them can be used to isolate risk and sell it to someone willing to accept it.
Synopsis
Uniquely positioned for practitioners who are considering the field of credit risk, and need a basic understanding of credit instruments.
Explains the fundamental concepts underlying credit risk instruments, and shows exactly how to use them to isolate and offload risk. Perfect for financial professionals who are new to credit risk and are considering moving into the derivatives markets. Prestigious authorship led by George Chacko, who is both a consultant to practitioners and teaches credit risk at Harvard. Synopsis
A GUIDE TO CREDIT RISK MARKETS FOR EVERY FINANCIAL PROFESSIONAL
- Simple, yet rigorous explanations: no credit derivatives experience necessary
- Covers essential principles, models, techniques, and widely used credit instruments, including credit default swaps (CDSs) and collateralized debt obligations (CDOs)
The credit risk market is the world's fastest growing financial market, attracting everyone from hedge funds to banks and insurers. Increasingly, corporate finance professionals must understand credit risk, both to manage risk in their own organizations and to consult with their clients. Most books in the field, however, are either too academic for practitioners or written for those who already possess extensive experience. "Credit Derivatives" fills the gap, explaining the credit risk market clearly and simply, in language any working financial professional can understand. The authors begin by explaining the underlying principles of credit, and the various risks associated with extending loans and other types of credit. Next, they systematically present today's leading methods and instruments for managing credit risk.The authors show how models can be used to gauge credit risk, and how credit derivatives can be used to isolate the risk and sell it to someone willing to accept it.The authors introduce a number of these credit derivatives--such as total return swaps, credit spread options, and credit linked notes--and devote two chapters to CDSs and CDOs, some of the most widely used credit instruments in the market. Whether you're a CFO, treasurer, or other financial practitioner, this book will give you the thorough grounding in credit derivatives youneed to use them safely and effectively. Every company faces credit risk. Credit derivatives are among the most powerful tools available for managing it. Once restricted to the financial industry, they are now widely used by businesses of all kinds--and all financial professionals need to understand them. "Credit Derivatives" explains these tools simply, clearly, and rigorously: what they do, how they work, and how to use them. The authors first show how credit risk can be measured and valued. They explain key ideas, such as recovery rates and credit spreads, and show how derivatives transfer credit risk to external investors. Next, they systematically demonstrate how credit risk models can describe and predict credit risk events. They cover three leading approaches: structural models, including those developed by Merton, Black and Cox; empirical models, such as the Z-score model; and reduced-form models, such as Jarrow-Turnbull. Finally, they thoroughly explain two widely used instruments: credit default swaps (CDSs) and collateralized debt obligations (CDOs).
- Understand, measure, and assess credit risk
Master core concepts, from credit spreads to default probabilities
- Master powerful credit risk modeling approaches
Learn structural, empirical, and reduced-form credit risk modeling
- Gain deep insight into today's most widely used instruments
Understand CDSs, CDOs, and more
- For every financial practitioner: buy-side and sell-side
For CFOs, treasurers, and other practitioners--everywhere from pension funds to commercial corporations
About the Author
George C. Chacko is an associate professor at Harvard Business School (HBS) in the finance area. He is also a managing director at IFL in New York. Professor Chacko’s work has focused on transaction costs and liquidity risk in capital markets, portfolio construction by institutions and individuals, and the analysis and application of derivative securities. He holds a Ph.D. in business economics from Harvard University and dual master’s degrees in business economics (Harvard University) and business administration (University of Chicago). He holds a bachelor’s degree in electrical engineering from the Massachusetts Institute of Technology.
Anders Sjöman is a senior researcher for Harvard Business School at its Paris-based Europe Research Center. He works across management disciplines throughout Europe, conducting research and developing intellectual material for HBS. He is an M.Sc.-graduate of the Stockholm School of Economics in his native Sweden, and initially specialized in information management and international business.
Hideto Motohashi is a manager in the Financial System Division at NTT COMWARE Corporation. He is currently consulting with financial institutions to help them introduce risk management systems. He completed the Advanced Study Program at Massachusetts Institute of Technology as a fellow. He holds a master’s degree in international management from Thunderbird, the Garvin School of International Management, and a bachelor’s degree in chemistry from Keio University, Japan.
Vincent Dessain is executive director of the Europe Research Center for Harvard Business School, based in Paris. The center he runs works with HBS faculty members on research and course development projects across the European continent. He holds a law degree from Leuven University (Belgium), a business administration degree from Louvain University (Belgium), and an MBA from Harvard Business School.
Table of Contents
About the Authors vii
Acknowledgments ix
Part I:What Is Credit Risk? 1
1 INTRODUCTION 3
2 ABOUT CREDIT RISK 9
Part II: Credit Risk Modeling 61
3 MODELING CREDIT RISK: STRUCTURAL APPROACH 63
4 MODELING CREDIT RISK: ALTERNATIVE APPROACHES 119
Part III: Typical Credit Derivatives 145
5 CREDIT DEFAULT SWAPS 147
6 COLLATERALIZED DEBT OBLIGATIONS 191
INDEX 247