Credit Derivatives and Structured Credit

Over the past decade, credit derivatives have emerged as the key
financial innovation in global capital markets. At end 2004, the
market size hit $6.4 billion (in notional amounts) from virtually
nothing in 1995. This rise has been spurred by the imperative for
banks to better manage their risks, not least credit risks, and the
appetite shown by institutional investors and hedge funds for
innovative, high yielding structured investment products. As a
result, growth in collateralized debt obligations and other
second-generation products, such as credit indices, is currently
phenomenal. It is enabled by the standardization and increased
liquidity in credit default swaps - the building block of the
credit derivatives market.

Written by market practitioners and specialists, this book
covers the fundamentals of the credit derivatives and structured
credit market, including in-depth product descriptions, analysis of
real transactions, market overview, pricing models, banks business
models. It is recommended reading for students in business schools
and financial courses, academics, and professionals working in
investment and asset management, banking, corporate treasury and
the capital markets.

Highlights include:

• Written by market practitioners and specialists with first-hand
  experience in the credit derivatives and structured credit
  market

• A clearly-written, pedagogical book with numerous
  illustrations

• Detailed review of real-case transactions

• A comprehensive historical perspective on market developments
  including up-to-date analysis of the latest trends

Autorentext

RICHARD BRUYERE, a partner of Finance Concepts (capital
markets and risk management consulting), is a former credit
derivatives professional with experience in marketing, trading and
structuring credit derivatives with SG and Credit Suisse First
Boston. He is the author of Produits drivs de crdit
(Economical: 1998, 2004).

RAMA CONT is a research scientist at Centre de
Mathématiques Appliques, Ecole Polytechnique (France) and
founding partner of Finance Concepts. He is the author of
several research articles in quantitative finance and co-author of
Financial modelling with jump processes (CRC Press, 2003)
and Produits drivs de crdit (Economica: 2004).

RGIS COPINOT is a Managing Director in Socite Gnrales
Credit trading department specialist in non-investment grade
credits. He has worked on derivatives products since 1992 in the
London markets first in the field of Commodities Options (1992)
later in Interest Rates Options (1994) and since 1998 in Credit
Derivatives. Rgis Copinot is graduated from Ecole Centrale Paris.
He is a co-author of Produits drivs de crdit (Economica:
2004).

LOC FERY is managing director in the Capital Markets
division of Calyon. He is in charge of the global Structured Credit
& CDO product-line, which includes correlation trading, as well
as Cash and Synthetic CDO structuring. Loc Fery is graduated from
HEC (Paris).

CHRISTOPHE JAECK joined Socit Gnrale credit derivatives
department in 1998. In charge of structured operations on balance
sheet management (synthetic CLOs) until 2001, he is now Head of
synthetic CDOs activity development in Europe. Christophe Jaeck is
a graduate from ENSAE.

THOMAS SPITZ began his career in Socit Gnrale as a credit
derivatives trader. He joined Crdit Agricole Indosuez in 2001 as
Head of Credit derivatives trading both on Europe and the United
States. Since 2004, in Calyon, he is the Head of Trading and Risk
Management team for the Structured Credit, Deivatives & CDO
Group. Thomas Spitz is a graduate from ENSAE.

Zusammenfassung
Over the past decade, credit derivatives have emerged as the key financial innovation in global capital markets. At end 2004, the market size hit $6.4 billion (in notional amounts) from virtually nothing in 1995. This rise has been spurred by the imperative for banks to better manage their risks, not least credit risks, and the appetite shown by institutional investors and hedge funds for innovative, high yielding structured investment products. As a result, growth in collateralized debt obligations and other second-generation products, such as credit indices, is currently phenomenal. It is enabled by the standardization and increased liquidity in credit default swaps the building block of the credit derivatives market. Written by market practitioners and specialists, this book covers the fundamentals of the credit derivatives and structured credit market, including in-depth product descriptions, analysis of real transactions, market overview, pricing models, banks business models. It is recommended reading for students in business schools and financial courses, academics, and professionals working in investment and asset management, banking, corporate treasury and the capital markets.

Highlights include:

• Written by market practitioners and specialists with first-hand experience in the credit derivatives and structured credit market
• A clearly-written, pedagogical book with numerous illustrations
• Detailed review of real-case transactions
• A comprehensive historical perspective on market developments including up-to-date analysis of the latest trends

Inhalt
Foreword. Introduction.

1 Credit Risk and the Emergence of Credit Derivatives.

1.1 Credit Risk.

1.1.1 Definition and Typology of Credit Risk.

1.1.2 Characteristics of Credit Risk.

1.1.3 The Importance of Credit Risk in Capital Markets.

1.2 Assessment and Measurements of Credit Risk.

1.2.1 Bank Capital Adequacy Standards (Basel I).

1.2.2 Credit Risk Analyzed by Rating Agencies.

1.2.3 Credit Risk Measured in the Financial Markets: Credit Spread.

1.3 Traditional Methods of Credit Risk Management and the Emergence of Credit Derivatives.

1.3.1 Traditional Methods for Managing Credit Risk (Issuer Risk).

1.3.2 Counterparty Risk Management in Derivatives Markets.

1.3.3 Emergence and Advantages of Credit Derivatives.

2 Typology of Credit Derivatives and their Main Applications.

2.1 Credit Default Swaps.

2.1.1 Description of Credit Default Swaps.

2.1.2 Comparison Between the CDS Market and the Cash Market: Basis.

2.1.3 Main Variations on CDSs.

2.2 Other Credit Derivatives.

2.2.1 Credit Spread Derivatives.

2.2.2 Synthetic Replication Products.

2.3 Main applications of Credit Derivatives.

2.3.1 Applications for Institutional Investors and Other Capital Market players.

2.3.2 Credit Derivative Applications in Bank Management.

2.3.3 Credit Derivative Applications for Corporates.

3 Second-Generation Credit Derivatives.

3.1 Basket Credit Default Swaps.

3.1.1 First-to-Default Credit Swaps.

3.1.2 Concrete Example.

3.1.3 Extension of the First-to-Default Principle: i to j-to-Default Products.

3.2 Hybrid Products.

3.2.1 Capital-Guaranteed/Protected Products.

3.2.2 Other Hybrid Products.

3.2.3 Concrete Example of a Transaction.

3.3 Credit Indices.

3.3.1 Introduction to Credit Indices.

3.3.2 Credit Index Mechanism, Pricing and Construction.

3.3.3 iTraxx Indices: a True Innovation to Benefit Investors.

4 Collateralized Debt Obligations.

4.1 Cash-Flow CDOs (Arbitrage CBOs and CLOs).

4.1.1 Origin of Arbitrage CBOs/CLOs.

4.1.2 Description of a CDO Structure.

4.1.3 Overview of the CBO/CLO Market and Recent Developments.

4.2 Balance Sheet-Driven CDOs.

4.2.1 Securitization of Bank Loans.

4.2.2 The Impact of Credit Derivatives: Synthetic CLOs.

4.2.3 Balance Sheet-Driven CDOs and Regulatory Arbitrage.

4.3 Arbitrage-Driven Synthetic CDOs.

4.3.1 The First Arbitrage-Driven Synthetic CDOs.

4.3.2 Actively Managed Arbitrage-Driven Synthetic CDOs. …