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Credit Derivatives, Synthetic Securitization and Hybrids

Duration: 2 days
  • Credit Default Swaps
  • Total Return Swaps
  • Credit Spread Forwards and Options
  • Basket Credit Derivatives
  • Credit Linked Notes
  • Synthetic and Hybrid CDO’s
  • Valuation of Synthetic CDO’s
The objective of this seminar is to give you a good understanding of the mechanics, pricing, risk analysis and applications of credit derivatives and structured credit products.

We start with a brief introduction to credit derivatives and an overview of the market for these instruments.

We then look in detail into the different types of credit derivatives: Credit default swaps, dynamic credit default swaps, total return swaps, equity default swaps, and credit spread forwards and basket credit derivates (including “first-to-default”, “second-to-default” and “nth-to-default” swaps).

In each case, we give an in-depth explanation of the definitions, mechanics, pay-out triggers, pay-out calculations, settlement methods and pricing. Through practical examples and exercises, participants will gain “hands-on” experience with the pricing of the various structures, using a range of alternative pricing models, including Merton-style option models, default intensity models, copula models, and Monte Carlo simulation.

We also demonstrate, using practical case studies, how various types of credit derivatives are used to hedge the credit risk of loans, bonds, loan portfolios and dynamic credit exposures.

Finally, we look at how credit default swaps and other credit derivatives are used as building blocks in creating structured and leveraged credit products such as credit linked notes, synthetic CDO’s, “bespoke”, single-tranche CDO’s, and hybrid CDO’s. We also look at some of the newest structures such as Leveraged Super-Senior transactions (LSS) and Constant Proportion Debt Obligations (CPDO’s). We carefully explain how these products are constructed and priced under different assumptions about default intensities and default correlations, and we discuss their special risk characteristics. We also give examples of how these products are used for “basis trading” and “correlation trading”.

Day One

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 Introduction and Overview

  • Credit derivatives and their predecessors
  • Historical development
  • Overview of instruments and markets

Credit Default Swaps

  • Definitions and Mechanics
  • Differences/Similarities with Asset Swaps
  • Pay-out Triggers (Default Events)
  • Settlement Methods
  • Pricing of CDS
  • Case Studies: Typical Applications of CDS (Transfer of Credit Risk, Yield Enhancement, Convertible Arbitrage, Hedging Counterparty Risk with Dynamic Credit Default Swaps)
  • Small Exercise

12.00 - 13.00 Lunch

13.00 - 16.30 Credit Default Swaps (Continued)

  • Basket Default Swaps
    • The Advantages of Using Basket Swaps
    • First-to-Default/Second-to-Default Swaps
    • Index default swaps (Itraxx)
  • Small Exercise

Equity Default Swaps

  • What is an Equity Default Swap?
  • Differences between EDS and CDS
  • Carry Trades with CDS and EDS
  • Small Exercise

Credit-Linked Notes

  • What is a Credit-Linked Note
  • Examples of Credit-Linked Notes
  • Structuring Credit-Linked Notes
  • Leveraged Credit Linked Notes
  • Case Study
  • Small Exercise

Day Two

09.00 - 09.15 Recap

09.15 - 12.00 Total Return Swaps

  • Mechanics and Applications of TR Swaps
  • Pricing of TR Swaps
  • Case Study
    • Using TR swap to create synthetic exposure to leveraged loan portfolio
  • Small Exercise

Credit Options

  • Options on Floating Rate Notes
  • Options on Asset Swap Packages
  • Credit Spread Forwards, Calls and Puts
  • Credit Spread Trading Strategies
  • Case Studies: Hedging Spread Risk
  • Pricing of Credit Options
  • Small Exercise

12.00 - 13.00 Lunch

13.00 - 16.30 Synthetic CDO’s

  • Synthetic Securitization
    • Structuring of a synthetic securitization
    • Case Study: Securitization of Bank Loans Using the KfW PROMISE/PROVIDE Program
  • Multi-tranche and Single-tranche Synthetic CDO’s
  • CDO-squared
  • Hybrid Synthetic/Cash CDO’s
  • Constant Proportion Debt Obligations
  • Valuation of Synthetic CDO’s
    • Structural Models
    • Reduced Form Models
    • Monte Carlo Simulation
  • Example: Using Factor Copula Model to Value Selected CDO Tranches
  • Basis Trading/Correlation Trading
  • CDO Risk Management
    • Hedging correlation risk
    • Delta-hedging single-tranche CDO’s
  • Small Exercises

Evaluation and Termination of the Seminar