What Are Credit Derivatives?
In the past, the choice of whether or not to advance money to a customer was up to the lender. Credit derivatives allow participants in capital markets to shift the credit risk that is associated with securities and loans. The landscape is dominated by credit default swaps, or CDS.
Total returns swaps and credit indexes are included as other types of credit derivatives. Cash instruments that fall under this topic include:
- Collateralized debt obligations (CDOs)
- Collateralized loan obligations (CLOs)
- Collateralized bond obligations (CBOs)
- Credit linked notes (CLNs)
The GFMI Introduction to Credit Derivatives Course
Course Objectives:
By the end of the course, the participant will be able to:
- Describe the features and characteristics of credit derivatives
- Identify the risks associated with credit derivatives
- Know how credit derivatives are used in the financial markets
- Discuss the basics of pricing
Introduction to Credit Derivatives Course Sessions
- Session 1: Introduction to Credit and Credit Derivatives introduces participants to basic credit derivatives structures. The features and characteristics are explored and basic applications are examined. The terminology and market conventions that are specific to this market will be explained using Bloomberg’s CDSW screen and the risks that are associated with these products will be identified.
- Session 2: Introduction to the Cash-CDS Basis and Asset Swaps will explore the relationship between the yield on asset swaps and CDS spreads. Asset swaps will be introduced and their connection to CDS pricing will be explored. By the end of this session, participants will be able to explain pricing CDS via asset swaps, apply CDS in trading strategies as well as hedging, analyze risk measurements, such as Spread DV01 and IR DV01 using Bloomberg’s CDSW, and discuss the impact that Basel III and the Dodd Frank Act has had on these markets.
- Session 3: Collateralized Debt Obligations deals with securitization and the CDO market. Examples from the market will be distributed and discussed. By the conclusion of this session, participants will be able to explain the basic asset securitization structure, describe the basic structures, features and characteristics and basic pricing of CBOs and CLOs, and identify the differences between funded and unfunded structures.
- Session 4: Structured Credit Derivatives Products will examine the basic credit derivative structures and how they are embedded in other securities. Products such as Credit Linked Notes (CLNs) and synthetic CDOs will be examined. By the end of this session, participants will be able to decompose the structured product into its main components, describe the main structures, and identify the main applications and risks associated with these products.
- Session 5: Credit indices will introduce the CDX and ITraxx indices examining their features and characteristics. After this session, course participants will be able to define credit indices, discuss their features and characteristics, and discuss correlation trading.
- The final session of the course, Session 6: Fundamental Credit Modeling, will examine the basics of credit pricing, including exposure at default, probability of default, and the recovery rate. By the end of this session, participants will be able to:
- Discuss different ways of managing exposure at default
- Define default correlation and discuss the sources used to determine the correlation number used in the markets for pricing
- Express how correlation impacts pricing for equity, mezzanine and senior tranches
- Discuss the recovery rate and explain how different recovery rates impact pricing
For additional information on this course and for our full course catalog, contact us at today +1-516-935-0923 or [email protected]!