Counterparty Risk of OTC Derivatives Training Course

This course will look at a variety of techniques used to measure and mitigate counterparty risk: netting, collateralisation, SPV, Credit Derivatives and other credit enhancement techniques.  It will be highly practical throughout and includes many fully functional models that you can take away with you and use as soon as you return to work.

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.

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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

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.