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Credit Transfer Products
Attend this 4-day course to acquire a unique, in-depth understanding how credit derivatives and related products operate in practice. By examining real structures, you will understand how the risks are transferred, or not, from all points of view including those of the regulators. The course will discuss how products are structured, priced and valued. Via a range of computer-based exercises and demonstrations, you will develop a first-hand understanding of the key models and their applications, which you will be able to apply immediately after the course.
Course overview
'Credit Transfer Products' will discuss how products are structured, priced and valued. Via a range of computer-based exercises and demonstrations, you will develop a first-hand understanding of the key models and their applications, which you will be able to apply immediately after the course.
Summary of course content
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Acquire an up-to-date working knowledge of credit derivative structures, applications, trading mechanisms, documentation and settlement
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Understand the relationship between credit derivatives and the physical credit markets such as corporate bonds
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Practise CDS pricing using both the cash markets and modelling approaches
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Discuss the latest structures in the CDO market
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Learn how CDO tranches may be constructed, rated, and risk managed
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Examine in detail the risk profile of CDO tranches from the perspective of an investor
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Value CDO tranches using both the latest Monte-Carlo simulation methods and also analytic approximations
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Analyse other synthetic credit-linked products, including CDO-squared and impaired portfolios
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Model and price index-linked tranches, and derive implied correlations
Methodology
This interactive course combines formal lectures with practical sessions, discussions and a wide range of computer-based exercises and demonstrations, to reinforce the learning and to ensure that delegates are ready to apply the course as soon as they return to their institutions.
Who should attend this training course?
- Derivative product specialists
- Structured finance executives
- Credit trading and salespeople
- Fixed income trading and sales
- End-users in corporations and investment management firms
- Credit portfolio managers
- Fixed income fund managers
- Derivatives sales
- Financial engineers
- Risk managers
- Lending, treasury and debt capital market executives
- IT staff supporting the structured products group
- Product controller
- Market regulators
Supporting publications
DAY ONE
The credit transfer market - a brief overview
The objective of this session is to provide a practical, current overview of the credit derivatives market; the main products, the main economic drivers, and the main players.
- Total return swaps
- Single-name Credit Default Swaps (CDSs)
- Insurance policy?
- Complete vs. contractual credit risk transfer
- Credit indices
- How is an index created?
- A brief look at the current family of indices
- Securitisation
Single-name CDSs
The objective of this session is to analyse, using a range of real casestudies, the precise mechanics of a CDS trade. It is designed, in particular, to assist the buyer of a CDS to understand the typical terms in the market.
- What does the term sheet for a generic CDS cover?
- The basic mechanics of a CDS
- Big Bang day: 8 April 2009
- Formation of Determination Committees
- What are the main issues that prevent the smooth running of the market?
- What are acceptable credit events?
- What will happen after Big Bang?
- Rolling coverage: {Today – 60 days}
- Issues around restructuring
- Europe's Small Bang day
- Quoting a CDS
- Long stubs and short stubs
- Spreads vs. up-front quotes plus running spreads
- Succession events
- What have been the main issues
- Role of the Determination Committee: {Today – 90 days}
- Example: decision concerning Dresdner Bank
- The alternative settlement procedures
- What are the current issues, and how are they being tackled?
- Credit event auctions - how do they work in detail?
- Detailed example: the Lehman Bros settlement
- Other examples: Fannie Mae and Freddie Mac, General Motors
- Credit event auction for restructuring
- Detailed example: settlement of Thomson restructuring
- Likely changes to the procedures
- Recent developments in the CDS markets and products
- Loan CDSs, AB CDSs, contingent CDSs and other forms
- Recovery swaps
- Electronic trading platforms, tearups, compression and other market improvements
- Centralised clearing
- Regulatory issues
DAY TWO
Pricing of generic single-name CDSs
Most financial markets may be divided into generic instruments, traded between the main market-makers, and non-generic instruments, tailored to customers. The objective of this session is to describe how generic CDSs are priced and hedged.
- Some fundamental theory: alternative ways of valuing a credit-risky cashflow
- Pricing a CDS as a spread over a riskfree curve
- Estimating the ASW spread
- Reminder: properties of a FRN
- Replicating a CDS using a pair of FRNs
- How to create a synthetic risky FRN using asset packaging techniques
- Hence, how to price and hedge a CDS from the cash market
- Estimating other spreads such as the z-spread
- How well does this pricing methodology work in practice?
- Properties of the "Basis"
Computer-based exercise: pricing and hedging a CDS off a corporate bond
Modelling CDSs
This session builds on the previous one, and describes how non-generic CDSs can be priced and hedged off the generic curve.
- Modelling the life of a CDS
- Forward default probabilities and related topics
- Pricing a CDS using a forward default probability curve
- Does the frequency of modelling matter?
- JP Morgan model
Computer-based exercise: price a CDS off a probability curve
- Converting spread prices to up-fronts
- The Standard Conversion model
- Calculating accrued spread and clean prices
- Estimation of input parameters
- Implying default probabilities off a CDS curve
- Other sources of default data (discussed briefly)
- Traditional accounting approaches
- Historic evidence
- Bond-based (reduced form) models
- Equity-based (Merton’s) models
- Modelling recovery rates
- Trading recovery - the new arbitrage?
Computer-based exercise: implying probabilities from a CDS curve
- Modelling non-generic CDSs
- Valuation of an old CDS for markto-market
- Pricing of structured CDSs
- Forward start CDS
- Option on CDS
- Floating CDS
Computer-based exercise: pricing a forward starting amortising CDS
DAY THREE
A brief overview of creditlinked portfolio products
- Credit indices
- How is an index created?
- A brief look at the current family of indices
- Corporate and sovereign indices
- Asset-backed indices
- The "roll" problem - an administrative nightmare
- Formation of VolX
- What are the main index-linked products, and how do they work?
- Funded CLNs
- Unfunded CDSIs
- Funded and unfunded tranche products
- Securitisation
- Examples of traditional securitisations
- Use of liquidity support facilities and other mechanisms
- Synthetic securitisation
- What happened in the sub-prime crisis
- Why did so many banks declare large losses?
Understanding how securitisation tranches work in practice
The objective of this session is to build on the previous ones, and consider in detail how a Securitisation works. This will be reinforced by both computer demonstrations and deal documentation.
- What is a waterfall?
- Alternative waterfalls
- Typical fees and expenses
- How do coverage tests work?
- PIKable tranches
- Risk-return profiles for each tranche
- Keep your eye on the cash
- Investor beware: issues to watch out for when buying tranches
Computer-based demonstration: demonstrating the above steps
- Risk management of tranches
- Assessment of delta and gamma
- Correlation risk of a tranche
- Comparison of senior and junior tranches
- Risk profile of a tranche compared to a straight loan
Computer-based demonstration: demonstrating the above steps
- How would the rating agencies model tranches? A detailed consideration:
- Stress testing a CDO tranche
DAY FOUR
Modelling a credit index
The objective of this session is to discuss, and demonstrate using computer-based simulations, various approaches to the modelling of credit indices.
- Bottom-up vs. top-down
- An overview of a typical bottom-up approach
- Simple copula approach with constant correlation
- Building a loss distribution using Monte-Carlo simulation
- Pricing a CDSI
- Impact of changing correlation
- Introducing a full correlation matrix into the model
- Modelling tranches
Computer-based demonstration: demonstrating the above steps
- An overview of a typical top-down approach
- 1-Factor approach to modelling a portfolio
- A Quasi-simulation model
- A Large Pool analytic model
- Pricing a CDSI
- Implying correlations from market prices
- Pricing a non-standard tranche
Computer-based exercise: pricing a tranche
Banking regulatory treatment of credit products
- Single-name CDSs
- From the buyer's perspective
- From the seller's perspective
- Securitisation tranches
- From the buyer's perspective
- From the seller's perspective
This last section is subject to change as the regulatory treatment is evolving from 2009 and beyond.
Course summary
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Dr. Richard Flavell
Dr Richard Flavell is a consultant in the financial services industry. Until recently, he was Director of Financial Engineering at Lombard Risk Systems, one of the leading providers of derivative trading systems around the world. In this role he led a team responsible for the mathematical development of Lombard’s derivative trading and risk management systems. At the same time, he also undertook extensive client/product training and consultancy projects.
Prior to his role at Lombard Risk, Richard was Head of Financial Engineering at ANZ Merchant Bank in London, and was Reader in Finance at The Management School, Imperial College, which is part of the University of London. He has worked with many banks and financial institutions around the world, advising them on their derivative and risk management activities.
He has an international reputation for his expertise in swaps, other derivatives and risk management. He is also Course Director of Euromoney’s Intermediary and Advanced Swaps programmes. Since their incepion in the late 1980s, these training courses have formed a core part of the professional training development for swaps and derivatives desks in leading banks around the world.
Richard has also published widely in both academic and professional literature. His approach to training is structured and practical. He has extensive experience and success in teaching both recent entrants to the derivatives markets, as well as highly experienced technical experts and market participants.
Courses run by this instructor
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This course has now expired please email us to find out when the course will next be running.