Structured Credit Portfolio Analysis, Baskets and CDOs: 1st Edition (Hardback) book cover

Structured Credit Portfolio Analysis, Baskets and CDOs

1st Edition

By Christian Bluhm, Ludger Overbeck

Chapman and Hall/CRC

376 pages | 104 B/W Illus.

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pub: 2006-09-29
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Description

The financial industry is swamped by credit products whose economic performance is linked to the performance of some underlying portfolio of credit-risky instruments, like loans, bonds, swaps, or asset-backed securities. Financial institutions continuously use these products for tailor-made long and short positions in credit risks. Based on a steadily growing market, there is a high demand for concepts and techniques applicable to the evaluation of structured credit products.

Written from the perspective of practitioners who apply mathematical concepts to structured credit products, Structured Credit Portfolio Analysis, Baskets & CDOs starts with a brief wrap-up on basic concepts of credit risk modeling and then quickly moves on to more advanced topics such as the modeling and evaluation of basket products, credit-linked notes referenced to credit portfolios, collateralized debt obligations, and index tranches. The text is written in a self-contained style so readers with a basic understanding of probability will have no difficulties following it. In addition, many examples and calculations have been included to keep the discussion close to business applications. Practitioners as well as academics will find ideas and tools in the book that they can use for their daily work.

Reviews

"For anyone who is interested in how CDOs or other instruments linked to baskets of credits are modeled, this book is essential reading. ….the book is a goldmine. If you are interested in how correlation products are modeled in practice, I can't imagine you not reading it. There is no other resource like it… the book is unique. Read it."

--Glyn A. Holton, Contingency Analysis

"This careful treatment of portfolio credit risk modeling is the first book of its type. The exposition is rigorous, relevant to real business applications, and easily accessible to those with a modeling background. Those doing research on basket credit products, or on the risk management of portfolios of corporate debt, will clearly want a copy at their side!"

-Darrell Duffie, James I. Miller Professor of Finance, The Graduate School of Business, Stanford University, California, USA

"The field of credit risk management, in general, and the modeling of structured credit products, in particular, constitutes an extremely important area of applied and methodological research in modern finance. It is very much welcomed that two well-known practitioners, both with a strong mathematical background, brought together

some of the concepts and tools which are now used by banks all over the world. Their contribution will no doubt further develop the field considerably."

-Paul Embrechts, Professor, Department of Mathematics, Swiss Federal Institute of Technology (ETH) Zurich and RiskLab, Switzerland

Table of Contents

From Single Credit Risks to Credit Portfolios

Modeling Single-Name Credit Risk

Ratings and Default Probabilities

Credit Exposure

Loss Given Default

Modeling Portfolio Credit Risk

Systematic and Idiosyncratic Credit Risk

Loss Distribution of Credit Portfolios

Practicability Versus Accuracy

Default Baskets

Introductory Example: Duo Baskets

First- and Second-to-Default Modeling

Derivation of PD Term Structures

A Time-Homogeneous Markov Chain Approach

A Non-Homogeneous Markov Chain Approach

Extrapolation Problems for PD Term Structures

Duo Basket Evaluation for Multi-Year Horizons

Dependent Default Times

Default Times and PD Term Structures

Survival Function and Hazard Rate

Calculation of Default Time Densities and Hazard

Rate Functions

From Latent Variables to Default Times

Dependence Modeling via Copula Functions

Copulas in Practice

Visualization of Copula Differences and Mathematical

Description by Dependence Measures

Impact of Copula Differences to the Duo Basket

A Word of Caution

Nth-to-Default Modeling

Nth-to-Default Basket with the Gaussian Copula

Nth-to-Default Basket with the Student-t Copula

Nth-to-Default Basket with the Clayton Copula

Nth-to-Default Simulation Study

Evaluation of Cash Flows in Default Baskets

Scenario Analysis

Example of a Basket Credit-Linked Note (CLN)

Collateralized Debt and Synthetic Obligations

A General Perspective on CDO Modeling

A Primer on CDOs

Risk Transfer

Spread and Rating Arbitrage

Funding Benefits

Regulatory Capital Relief

CDO Modeling Principles

CDO Modeling Approaches

Introduction of a Sample CSO

A First-Order Look at CSO Performance

Monte Carlo Simulation of the CSO

Implementing an Excess Cash Trap

Multi-Step and First Passage Time Models

Analytic, Semi-Analytic, and Comonotonic CDO Evaluation Approaches

Single-Tranche CDOs (STCDOs)

Basics of Single-Tranche CDOs

CDS Indices as Reference Pool for STCDOs

ITraxx Europe Untranched

ITraxx Europe Index Tranches: Pricing, Delta

Hedging, and Implied Correlations

Tranche Risk Measures

Expected Shortfall Contributions

Tranche Hit Contributions of Single Names

Applications: Asset Selection, Cost-to-Securitize

Remarks on Portfolios of CDOs

Some Practical Remarks

Suggestions for Further Reading

Appendix

The Gamma Distribution

The Chi-Square Distribution

The Student-t Distribution

A Natural Clayton-Like Copula Example

Entropy-Based Rationale for Gaussian and Exponential

Distributions as Natural Standard Choices

Tail Orientation in Typical Latent Variable Credit Risk Models

The Vasicek Limit Distribution

One-Factor Versus Multi-Factor Models

Description of the Sample Portfolio

CDS Names in CDX.NA.IG and iTraxx Europe

About the Series

Chapman and Hall/CRC Financial Mathematics Series

Learn more…

Subject Categories

BISAC Subject Codes/Headings:
BUS027000
BUSINESS & ECONOMICS / Finance
MAT000000
MATHEMATICS / General
MAT029000
MATHEMATICS / Probability & Statistics / General