Credit
The Complete Guide to Pricing, Hedging and Risk Management
By Angelo Arvanitis and Jon
Gregory
"Professional risk
managers and academics will benefit from reading this excellent book. It is well written,
offers much valuable information and deserves to become a standard reference book... the
authors have done a great job"
Stuart Turnbull Canadian Imperial Bank of Commerce, Risk magazine - December 2001
Provides a consistent
firm-wide platform for pricing, hedging and risk management of credit across a broad range
of product classes
- Emphasises
fixed income instruments rather than loans, where stochastic future exposures are modelled
accurately
- Provides
a thorough analysis of the pricing and hedging of basket credit derivatives and other
credit contingent products
- Examines
loans, credit derivatives, interest rate derivatives with risky counterparties and
convertible bonds
- Adapts
credit derivative modelling techniques in order to price and hedge the credit component in
fixed income derivatives
- It
provides a practical discussion of market frictions that impact credit trading
- Complex
theoretical issues are illustrated with an unusually high number of examples, tables and
figures that have been designed with the practitioner in mind
- It
is self-sufficient. Proofs and technicalities are discussed in the appendices of each
chapter \
Contents
Introduction PART I
1 - Overview of Credit Risk
1.1 Components of Credit Risk
1.2 Factors Determining the
Credit Risk of a Portfolio
1.3 Traditional Approaches to
Managing Credit Risk
1.4 Market Risk versus Credit
Risk
1.5 Historical Data
1.6 An Example of Default
Loss Distribution
1.7 Credit Risk Models
1.8 Conclusion
2 - Exposure Measurement
2.1 Introduction
2.2 Exposure Simulation
2.3 Typical Exposures
2.4 Conclusion
3 - A Framework for Credit
Risk Management
3.1 Credit Loss Distribution
and Unexpected Loss
3.2 Generating the Loss
Distribution
3.3 Example - One Period
Model
3.4 Multiple Period Model
3.5 Loan Equivalents
3.6 Conclusion
Appendix A - Derivation of
the Formulas for Loan
Equivalent Exposures Appendix
B - Example Simulation Algorithm
4 - Advanced Techniques for
Credit Risk Management
4.1 Analytical Approximations
to the Loss Distribution
4.2 Monte Carlo Acceleration
Techniques
4.3 Extreme Value Theory
4.4 Marginal Risk
4.5 Portfolio Optimisation
4.6 Credit Spread Model
4.7 Conclusion
PART II - PRICING AND HEDGING
OF CREDIT RISK
3 - Credit Derivatives
5.1 Introduction
5.2 Fundamental Credit
Products
5.3 Fundamental Ideas on
Pricing Credit
5.4 Pricing Fundamental
Credit Products
5.5 Credit Spread Options
5.6 Multiple Underlying
Products
5.7 Conclusion
6 - Pricing Counterparty Risk
in Interest Rate Derivatives
6.1 Introduction
6.2 Overview
6.3 Expected Loss versus
Economic Capital
6.4 Portfolio Effect
6.5 The Model
6.6 Interest Rate Swaps
6.7 Cross-Currency Swaps
6.8 Caps and Floors
6.9 Swaptions
6.10 Portfolio Pricing '
6.11 Extensions of the Model
6.12 Hedging
6.13 Conclusion Appendix A -
Derivation of the Formula for the Expected
Loss on an Interest Rate Swap
Appendix B - The Formula for the Expected Loss on an
Interest Rate Cap or Floor
Appendix C - Derivation of the Formula for the Expected
Loss on an Interest Rate
Swaption (Hull and White
Interest Rate Model) Appendix
D - Derivation of the Formula for the Expected
Loss on a Cancellable
Interest Rate Swap Appendix E - Market Parameters used for the Computations
7 - Credit Risk in
Convertible Bonds
7.1 Introduction
7.2 Basic Features of
Convertibles ^
7.3 General Pricing
Conditions
7.4 Interest Rate Model
7.5 Firm Value Model
7.6 Credit Spread Model
7.7 Comparison of the two
Models
7.8 Hedging of Credit Risk
7.9 Conclusion
Appendix A - Firm Value Model
- Analytic Pricing Formulae
Appendix B - Derivation of
Formulae for Trinomial Tree
with Default Branch
Appendix C - Effect of
Sub-optimal Call Policy Appendix D - Incorporation of "Smile" in the Firm Value
Model
8 - Market Imperfections
8.1 Liquidity Risk
8.2 Discrete Hedging
8.3 Asymmetric Information
8.4 Conclusion
Appendix
; 1. Credit Swap Valuation -
Darrel Duffie
2. Practical use of Credit
Risk Models in Loan Portfolio and
Counterparty Exposure
Management - Robert A. Jarrow ; and Donald R. van Deventer
3. An Empirical Analysis of
Corporate Rating Migration, Default and Recovery - Sean C. Keenan, Lea V. Carty and David
T. Hamilton
4. Modelling Credit Migration
- Bill Demchak
5. Haircuts/or Hedge Funds -
Ray Meadows
6. Generalising with HJM -
Dmitry Pugachevsky
Glossary Index
520 pages
