Mastering Credit Derivatives Training Course
Course Highlights and Agenda
Mastering credit derivatives is intended to give delegates a good grounding in all aspects of the credit derivatives market - products, applications, documentation and pricing. Its main focus is the needs of the end user and correctly applying the complex array of solutions. The course will review recent credit events and recent market events that have challenged the robustness of the standard credit derivative contract. There will also be a review of the most recent changes in market structure.
The course assumes a basic understanding of bond, loans and the capital markets.
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Products and Applications
This module provides an overview of current market developments focusing on structural changes in the market. The product range and applications are discussed as are current challenges facing the market.
- Current market developments
- Structural changes in the credit derivatives market
- Single name vs. correlation trading
- Current challenges facing the market
- FRN market, review of recent transactions, relationship with CDS
- Synthetic FRNs (asset swaps)
- Spreads of government bonds and swaps
- Z spreads
Case Study: Where can we check pricing?
Fundamentals of Pricing and Valuation
How to price simple credit derivatives, the impact of drivers affecting the CDS basis
- Probability of default
- Recovery rate
- The ratings agencies
- Reviewing data and information available including Markit and Bloomberg
- Pricing CDS vs asset swaps – the basis
- Unwinding CDS trades and mark-tomarket
- Pricing total return swaps
- Credit linked notes
Case Study: Comparing the cash flows using different instruments
Credit Default Swap Trading Applications
- Negative and positive basis trading
- Understanding the credit curve
Exercise: Credit derivative trading applications
The Regulatory Environment
The reasoning behind regulators’ responses to the crisis
- Overview of Basel II, III and risk based capital
- Capital treatment of credit derivatives
- Regulatory responses to the crisis
- Recent developments in the Eurozone
Complex Credit Derivatives
Beyond single name products. This section of complex products takes the basic Credit Default Swap and shows how complex products can be created by adding in securities, increasing the number of Reference Entities, and reallocating the risk into different tranches. This leads to a detailed section on Synthetic CDOs and Single Tranche Synthetic CDOs. The section on Index Products looks in some detail at this addition to the credit derivatives market. The last part – Risk Considerations – discusses the risks inherent in complex credit products.
- Credit Linked Notes
- Nth Loss and Nth Default
- CDOs and Synthetic CDOs
- Credit spread options
- Capital structure arbitrage
- Index Products - Overview of iTRAXX and CDX
– structure, functionality and usage
- Risk considerations
Case Study: Credit index trading strategies
Case Study: CDS pricing using excel and establishing default probabilities
Risk management and investor applications
- Review of user rationale: line, risk, capital and balance sheet management, trading strategies and discussion of investor benefits
- Transaction examples for different user groups (bank, insurance company, corporate, funds)
Legal and Documentation
Keeping up with the developments in this complex and evolving area of structuring
- Analysis of actual credit events
- Detailed analysis of ISDA definitions
- The use of master confirmations:
– geographical variations
- Outstanding issues
Case Study: Analysing a number of legal difficulties
Introduction to Mathematics of Derivatives
- The Greeks
- The volatility trader – how they review their positions
- Delta hedging and its dynamics – what are traders looking for
- Rho, theta, vega – brief overview of the importance of these measures
- Delta and gamma
Case Studies: Putting it all together: worked examples by delegates
The delegates work on the case studies in small groups and then present the results to the whole group.
Case Study: Valuing a credit linked note and other structured products
What You Will Learn
"It has all been so useful, there is no way I can pick the one topic I found most valuable!"
"Found the course very stimulating. ..Impressed with the trainer."
"One of the few courses I have been on that will have a direct benefit for my work……..What I liked most about the course was the way it enabled me to gain a greater understanding of my work and the way the course was presented was very good"