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Credit and credit risk permeates every corner of the financial
world. Previously credit tended to be acknowledged only when
dealing with counterparty credit risk, high-yield debt or
credit-linked derivatives, now it affects all things, including
such fundamental concepts as assessing the present value of a
future cash flow. The purpose of this book is to analyze credit
from the beginning--the point at which any borrowing entity
(sovereign, corporate, etc.) decides to raise capital through its
treasury operation. To describe the debt management activity, the
book presents examples from the development banking world which not
only presents a clearer banking structure but in addition sits at
the intersection of many topical issues (multi-lateral agencies,
quasi-governmental entities, Emerging Markets, shrinking pool of
AAA borrowers, etc.).
This book covers:
Curve construction (instruments, collateralization,
discounting, bootstrapping)
Credit and fair valuing of loans (modeling, development
institutions)
Emerging markets and liquidity (liquidity, credit, capital
control, development)
Bond pricing (credit, illiquid bonds, recovery pricing)
Treasury (funding as an asset swap structure, benchmarks for
borrowing/investing)
Risk and asset liability management (leverage, hedging, funding
risk)
Auteur
BIAGIO MAZZI, PHD, is a Senior Financial Officer on the Structured Notes Desk in the World Bank Treasury. Prior to the World Bank, Biago Mazzi was a Vice President at Morgan Stanley, where he was responsible for modeling exotic credit derivatives on the Emerging Markets Desk. Before working in fixed income, he was an equity derivatives quant at Barclays Capital and Banca Caboto. He holds a PhD in theoretical physics from the University of Cambridge.
Résumé
Credit and credit risk permeates every corner of the financial world. Previously credit tended to be acknowledged only when dealing with counterparty credit risk, high-yield debt or credit-linked derivatives, now it affects all things, including such fundamental concepts as assessing the present value of a future cash flow. The purpose of this book is to analyze credit from the beginningthe point at which any borrowing entity (sovereign, corporate, etc.) decides to raise capital through its treasury operation. To describe the debt management activity, the book presents examples from the development banking world which not only presents a clearer banking structure but in addition sits at the intersection of many topical issues (multi-lateral agencies, quasi-governmental entities, Emerging Markets, shrinking pool of AAA borrowers, etc.).
This book covers:
Contenu
List of Figures xiii
List of Tables xvii
Acknowledgments xix
Introduction xxi
I. 1 Treasury, Funding, and the Reasons behind This Book xxi
I. 2 Funding Issues as Credit and Pricing Issues xxiii
I. 3 Treasury Finance and Development Banking xxv
I. 4 The Structure of the Book xxvi
Chapter 1 An Introductory View to Banking, Development Banking, and Treasury 1
1.1 A Representation of the Capital Flow in a Financial Institution 2
1.2 Lending 3
1.3 Borrowing 7
1.4 Investing and ALM 10
1.5 The Basic Structure of a Traditional Financial Institution 12
1.5.1 Private and Public Sides 12
1.5.2 Sales and Trading Desks 13
1.5.3 The Treasury Desk 14
1.6 Development Banking 17
1.6.1 The Different Types of Development Institutions 17
1.6.2 The Structure of a Development Bank 19
Chapter 2 Curve Construction 21
2.1 What Do We Mean by Curve Construction? 22
2.2 The Instruments Available for Curve Construction 24
2.2.1 Discount Bonds and Cash Deposits 24
2.2.2 Interest Rate Futures and Forward Rate Agreements 26
2.2.3 FX Forwards 28
2.2.4 Interest Rate Swaps 30
2.2.5 Basis Swaps 34
2.2.5.1 Tenor Basis Swaps 34
2.2.5.2 Cross Currency Basis Swaps 35
2.3 Using Multiple Instruments to Build a Curve 37
2.4 Collateralized Curve Construction 42
2.4.1 The Evolution of the Perception of Counterparty Credit Risk 42
2.4.1.1 Overnight Index Swaps 43
2.4.2 Discounting in the Presence of Collateral 46
2.4.2.1 Collateral in a Foreign Currency 47
2.4.3 Clearing, the Evolution of a Price, and the Impact of Discounting 48
2.4.4 The Special Case of AAA-Rated Institutions 52
2.5 Numerical Example: Bootstrapping an Interest Rate Curve 55
2.5.1 The Short End of the Curve: Deposits and FRAs 56
2.5.2 The Long End of the Curve: Interest Rate Swaps 58
2.5.3 Interpolation and Extrapolation 62
Chapter 3 Credit and the Fair Valuing of Loans 67
3.1 Credit as an Asset Class 67
3.1.1 The Underlyings 69
3.1.2 Credit Default Swaps 71
3.2 A Brief Overview of Credit Modeling 75
3.2.1 Hazard Rates and a Spread-Based Modeling of Credit 78
3.2.2 The Bootstrapping of a Hazard Rate Curve 81
3.2.3 Different Quotations and Different Currencies 84
3.3 Fair Value of Loans and the Special Case of Development Institutions 88
3.3.1 The Argument around the Fair Valuing of Loans 88
3.3.2 Prepayment Option and the Case of Development Institutions 91
3.4 Numerical Example: Calculating the Fair Value of a Loan 95
Chapter 4 Emerging Markets and Liquidity 101
4.1 The Definition of Emerging Markets 101
4.2 The Main Issues with Emerging Markets 103
4.2.1 Liquidity 103
4.2.2 Maturity 108
4.2.3 Credit 110
4.2.4 Capital Control 112
4.3 Emerging Markets and Development Banking 116
4.3.1 Borrowing 116
4.3.2 Lending 118
4.4 Case Studies of Development Projects 122
4.4.1 Rural Development in X 122
4.4.2 Development of Textile Exports in Y 124
Chapter 5 Bond Pricing 127
5.1 What Is a Bond? 127
5.2 A Few Fundamental Concepts of the Bond World 129
5.2.1 Par 129
5.2.2 Yield 130
5.2.3 Duration 134
5.3 Expressing Credit Explicitly When Pricing a Bond 138
5.3.1 Benchmarks and Z-Spreads 138
5.3.2 Asset Swaps 142
5.3.3 Constructing a CDS-Implied Credit Framework for Bond Pricing 146
5.4 Illiquid Bonds 150
5.4.1 Pricing at Recovery 151
5.4.2 Case Study: The Default of Greece 155
5.4.3 Building Proxies 161
5.4.3.1 The Case of Missing Maturities 162 ...