Credit Risk Training Course
Course Highlights and Agenda
Revised to take into consideration the impact of the global credit crisis, this state-of-the-art credit risk course is essential for every risk management professional.
Starting with an analysis of the credit risk of a single counterparty and transaction-based models, this course moves on to describe the models for evaluating a portfolio of counterparties.
During the second part of the course, credit rating systems are explained, followed by the models used in the context of portfolios of counterparties and portfolio optimisation and performance. The course also provides an in-depth insight into the credit risk mitigation tools and the implementation of Basel II. A practical guide to the latest developments within credit risk, this course will provide you with structured presentations, practitioners' expertise and market examples.
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Introduction to Fundamental Credit Risk and Analysis
- What is credit risk and how does it arise?
- The credit crunch and its origins – how has this affected our approach to credit risk?
- Definitions of default, failure to pay and other events
- Simple models of corporate structure and default processes
- Credit risk as default probability, recovery rates and exposure
- Relationship to balance sheet and cash flow statements
- Relationships to debt and equity prices
- Ratings agents approach to credit risk – has it failed?
- Lessons to be learned from the credit crunch and sub-prime debacle
- How did Lehman’s collapse?
Portfolio Credit Risk
- Probability of default, loss given default and correlation of default
- Credit risk of portfolios compared with single positions
- Loss distributions and relationship to expected loss, worst credit loss, economic and regulatory capital
- Introduction to portfolio credit risk models
- Optimising portfolios for best risk/return
Computer Workshop: Spreadsheet exercises using simple portfolio credit model
Overview of Basic Statistics
- Some elementary statistics
– Volatility of market factors
– Exercise: Estimation of market factor volatilities
– Covariance and correlation, correlation matrix
– Exercise: Estimation of market factor correlations
– Problems with real-world data
- Monte Carlo simulation methodology
– Overview of Monte Carlo technique
– Cholesky decomposition
– Exercise: Performing Cholesky decomposition
– Problems with the variance/covariance matrix
Modelling Credit Exposure of OTC Derivative Products
- Loans and derivatives
- Transaction-based models
- Foreign exchange transactions
- Interest rate swap transactions
- CEF calculations
- Effect of CMTM
- Market factor-based models
- Counterparty exposure simulation models
- Handling credit exposure limits
- Integration of netting
- Integration of margin/collateral
- Integration of liquidity risk
- Stress testing
– Incremental transactions
– Market discontinuities
- What lessons have we learned from the credit crunch with regard to stress testing?
Evaluating the Credit Risk of Derivatives
- Expected and unexpected credit loss
- Default only versus economic loss
- Credit loss profile
- Simulation approach to economic capital
- Risk rating model
- Rating migration matrix
- Loss given default
Managing Credit Risk: Securitisation and Risk Transformation
- Concepts of regulatory capital for credit risk and return on assets
- Techniques for moving risk off balance sheet
– Securitisation and synthetic securitisation
– CDOs and other tranche products
- Pros and cons of securitisation for origination firms and investors
- The role of rating agents
- The roots and effects of sub-prime meltdown
- How has the model broken down in the credit crunch?
- What is going to replace it?
Case Study: Analysis of a CDO in the sub-prime meltdown
Managing Credit Risk: Credit Derivatives and Risk Transfer
- What are credit derivatives and why are they used?
- Single name credit derivatives (unfunded and funded structures)
– Credit Default Swap (CDS)
– Total return swap
– First-to-default basket note
- Pricing and risk of single obligor credit derivatives
- Basket and Tranche CDS
- Regulatory capital impacts of credit derivatives
- Documentation and legal issues
Computer Exercise: Spreadsheet exercises with single name credit derivatives
Regulatory Capital - Requirements for Credit Risk
- Regulatory capital under Basel I
- Regulatory capital under Basel II
- Proposals under Basel III
- Standardised approach
- Foundation internal ratings based approach
- Advanced internal ratings based approach
- Basel II risk weight functions
- Basel trading book issues
– Counterparty credit exposure
– Double default effects
– Short-term maturity adjustment
– Unsettled trades
- Wrong way risk
- CVA, FVA and DVA
- What changes can we expect in the future as a result of the credit crunch?
Group Discussion: Credit risk management post credit crunch – a new paradigm? How will we make money in the new high cost, low leverage world?
What You Will Learn
"I have definitely gained new skills from the course, especially in the technical approach to assess credit derivative positions…The leader was excellent with great insight on current events…One of the best courses I have attended"
"Very good course speaker, lots of experience, great use of practical examples"
"The knowledge fo the lead instructor is world class, delivered in a fashion that can be understood by all attending the course."