Counterparty Risk of OTC Derivatives

The credit crisis created a climate of fear around counterparties in OTC derivative markets. This course will help you develop the skills to understand the risks of dealing with OTC derivatives.

Course Highlights

Attend this highly practical two-day programme and you will learn:

Best practice techniques for pricing and hedging counterparty risk, illustrated with real world case studies and models
Bilateral and multilateral payment and closeout netting techniques
How to structure derivative transactions that actually reduce your exposure to counterparty risk
State-of-the-art approaches for collateralisation – in theory and in practice
Tools for dealing with “wrong way” counterparty risk
The latest strategies and techniques for reducing credit exposure
How to deal with the problems created by the credit risk of derivatives

….and many other critical topics.

For details of the course trainer, please download the course brochure

Booking Information

Dates	Prices	Book This Course	Discount
18 - 19 Oct 2010	£ 1999		-

Course Programme

Overview of Credit Risks and Their Effects

Credit risk vs. market risk
Assessing the three components of credit risks:

Exposure to single counterparty
Default probability
Recovery rates

Current exposure, potential future exposure (PFE)
Expected exposure and worst case exposure
Exposure during the close–out period

Workshop

Credit risk of OTC options
Credit risk of zero cost collars
Credit risk of exotic options
The evolution of credit risk of interest rate swaps through time
Credit risk of interest rate swaps, equity swaps, total returns swaps and credit default swaps
"Wrong way" credit exposure

Probability of Default

A comparison of three approaches to default:

Flesaker et al
Black, Scholes & Merton
Longstaff & Schwartz

Credit rating vs. the probability of default

Evaluating the Purpose of Credit Enhancement Techniques

Control credit exposure and minimise risk
Improving return on capital
Solving problems created by credit risk of derivatives

Collateralisation

What is collateralisation?
Assessing collateralisation as a credit risk mitigator and as a business driver
Determining the need: cost versus benefits of implementing collateralisation
Identifying constituents for effective collateralisation:

liquidity
security interests

Using collateral to reduce risk-based capital requirements
Trends in collateralisation

Implementing Collateralisation of Derivatives to Reduce Credit Risk

How to select and value collateral effectively

How to measure accurately the exposure to be collateralised
Determining what is acceptable collateral
How to value collateral effectively

Identifying types of collateral which are effective for giving a complete offset
Deciding when to use bilateral collateral agreements or one way collateral agreements
Collateralisation as a tool in portfolio management: legal, security and liquidity issues that enhance the credit rating and quality of a portfolio

Case study

The curious case of the negative yields on the US T–Bills

Special Purpose Vehicles

Who created these and why
Reaction to SPVs by the clients
How to isolate the SPV from the parent

Credit Enhancement in Asset Backed Securities

Internal vs. external credit enhancement techniques
The role of Monoline insurance companies
Examining several deals and observing the credit enhancement

Case study

Ambac and MBIA during the credit crunch

Netting as a Successful Technique for Reducing Credit Exposure

What are the principal forms of netting
Identifying the risks and how netting can mitigate these risks
Cross-border netting/cross product netting
Assessing the impact of netting on a counterparty's potential credit exposure
Understanding the role of the regulators and their interest in netting systems
How documentation can strengthen your netting position
Bilateral netting, Multilateral netting
Payment Netting and Closeout Netting

Case study

Detailed, worked out examples of netting schemes

Workshop

Credit Portfolio Management: in this workshop, delegates will analyse portfolios using a leading portfolio credit risk management system: Hull, Nelken & White: Volatility Skews and the Credit Markets

Credit Derivatives and their Uses – Different Structures

Credit Default Swaps
Total return swaps
Credit linked notes
Put credit spreads on asset swaps
Convertible bond asset swaps (CBAS)
Collateralised Debt Obligations CDO's)
Collateralised Bond Obligations (CBOs) and collateralised Loan Obligations (CLOs)
Contingent Credit Default Swaps (CCDS)
Downgrade options and their uses

Case studies

Detailed examples of the impact of credit derivatives on economic and regulatory capital

Workshop

Delegates will create a simple CDO

Credit Indexes

iTraxx and Markit CDX indexes
Tranching
Senior and Super Senior Tranche

Case studies

How and why models failed: the rise of the humans