For banks and financial institutions a sea of changes has occurred in the past few years as a response to the credit crisis. A new capital adequacy framework, strengthened and specific credit risk regulations under Basel II / III, and recent innovations in the credit derivative arena are all highlighting the increasing scrutiny on credit issues. More than ever before, financial institutions and large corporates will therefore have to be able to assess, calculate and model the embedded credit risk of assets as well as the risk generated by the use of counterparties for hedging or trading purposes.
This course is designed to provide professionals with a broad understanding of modern credit risk modelling techniques. During this training programme, participants will look in details at some of the more important models used for the pricing of default risk inherent to holding assets or embedded within credit derivatives. The focus of the course together with the choice of exercises and examples will enable participants to understand the different stepping stones used in the design of the models in an easy way and the reasons why the models can be validated. Delegates will examine how different risk elements, such as interest rate, default and recovery values intertwine in those models.
Participants will be able to appreciate the credit models commonly used to calculate EAD (Exposure at Default), PD (Probabilities of Default) and LGD (Loss Given Default) as well as counterparty risk assessment models based on potential future exposure at default. We examine recent modelling issues of funding and market liquidity, basis risk and counterparty risk, and learn the meaning and use of the different value adjustments and notions such as wrong-way risk and liquidity issues.
This course is highly interactive with presentations, exercises, examples, workshops and discussions. It is supported by a range of computer-based exercises to help delegates put the concepts covered into practice.
Workshop: Computation of theoretical credit spread for an amortizing asset with given LGD, PD and EAD at different maturity stages
Exercise: Assessment of the credit spread value for an asset given the market perception of the underlying credit risk and CDS / bond market information
Exercise and discussion: Using an asset swap to uncover market credit risk spreads. Unbundling the different risk component of an asset and using CDS to mitigate risks.
Workshop: How to use various financial instruments to replicate an option (Black & Scholes) synthetically. How to derive Credit Spreads from a practical point of view.
Exercise and discussion: How to price a Credit Default Swap with the use of a structural model by looking at both the premium value and protection legs.
Exercise: How to price a Credit Default Swap with the use of a reduced-form approach model such as JLT and appreciate the implications of credit ratings
Workshop: How to use a reduced-form transition matrix model based spreadsheet for pricing credit derivatives.
Exercise: How to assess the cost of replicating collateral account at predefined asset’s path
Workshop: Analysing the various elements of Counterparty Risk with a practical example and the hedge with a contingent credit default swaps (CCDS)