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Modelling Single-Name and Multi-name Credit Derivatives

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ISBN-10: 0470519282

ISBN-13: 9780470519288

Edition: 2008

Authors: Dominic O'Kane

List price: $159.00
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Description:

The credit derivatives market has grown significantly and rapidly over the past 8 years. However, it is only in the last 4 years that we have seen the advent of the CDS index portfolios such as CDX and iTraxx and their rapid domination of the market. These have revolutionised the credit derivatives market, increasing liquidity and significantly broadening the user base. On top of this, we also have the arrival of CDO tranches linked to these portfolios which has resulted in large and liquid market in default correlation, something that was almost unimaginable 4 years ago. This has created significant challenges for credit modellers as it has essentially rendered earlier correlation models…    
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Book details

List price: $159.00
Copyright year: 2008
Publisher: John Wiley & Sons, Incorporated
Publication date: 8/4/2008
Binding: Hardcover
Pages: 512
Size: 6.85" wide x 9.85" long x 1.33" tall
Weight: 2.376
Language: English

Dominic O'Kane is an affiliated Professor of Finance at the French business school EDHEC which is based in Nice, France. Until May 2006, Dominic O'Kane was a managing director and ran the European Fixed Income Quantitative Research group at Lehman Brothers, the US investment bank. Dominic spent seven of his nine years at Lehman Brothers working as a quant for the credit derivatives trading desk.

Acknowledgements
About the Author
Introduction
Notation
The Credit Derivatives Market
Introduction
Market Growth
Products
Market Participants
Summary
Building the Libor Discount Curve
Introduction
The Libor Index
Money Market Deposits
Forward Rate Agreements
Interest Rate Futures
Interest Rate Swaps
Bootstrapping the Libor Curve
Summary
Technical Appendix
Single-Name Credit Derivatives
Single-name Credit Modelling
Introduction
Observing Default
Risk-neutral Pricing Framework
Structural Models of Default
Reduced Form Models
The Hazard Rate Model
Modelling Default as a Cox Process
A Gaussian Short Rate and Hazard Rate Model
Independence and Deterministic Hazard Rates
The Credit Triangle
The Credit Risk Premium
Summary
Technical Appendix
Bonds and Asset Swaps
Introduction
Fixed Rate Bonds
Floating Rate Notes
The Asset Swap
The Market Asset Swap
Summary
The Credit Default Swap
Introduction
The Mechanics of the CDS Contract
Mechanics of the Premium Leg
Mechanics of the Protection Leg
Bonds and the CDS Spread
The CDS-Cash basis
Loan CDS
Summary
A Valuation Model for Credit Default Swaps
Introduction
Unwinding a CDS Contract
Requirements of a CDS Pricing Model
Modelling a CDS Contract
Valuing the Premium Leg
Valuing the Protection Leg
Upfront Credit Default Swaps
Digital Default Swaps
Valuing Loan CDS
Summary
Calibrating the CDS Survival Curve
Introduction
Desirable Curve Properties
The Bootstrap
Interpolation Quantities
Bootstrapping Algorithm
Behaviour of the Interpolation Scheme
Detecting Arbitrage in the Curve
Example CDS Valuation
Summary
CDS Risk Management
Introduction
Market Risks of a CDS Position
Analytical CDS Sensitivities
Full Hedging of a CDS Contract
Hedging the CDS Spread Curve Risk
Hedging the Libor Curve Risk
Portfolio Level Hedging
Counterparty Risk
Summary
Forwards, Swaptions and CMDS
Introduction
Forward Starting CDS
The Default Swaption
Constant Maturity Default Swaps
Summary
Multi-Name Credit Derivatives
CDS Portfolio Indices
Introduction
Mechanics of the Standard Indices
CDS Portfolio Index Valuation
The Index Curve
Calculating the Intrinsic Spread of an Index
The Portfolio Swap Adjustment
Asset-backed and Loan CDS Indices
Summary
Options on CDS Portfolio Indices
Introduction
Mechanics
Valuation of an Index Option
An Arbitrage-free Pricing Model
Examples of Pricing
Risk Management
Black's Model Revisited
Summary
An Introduction to Correlation Products
Introduction
Default Baskets
Leveraging the Spread Premia
Collateralised Debt Obligations
The Single-tranche Synthetic CDO
CDOs and Correlation
The Tranche Survival Curve
The Standard Index Tranches
Summary
The Gaussian Latent Variable Model
Introduction
The Model
The Multi-name Latent Variable Model
Conditional Independence
Simulating Multi-name Default
Default Induced Spread Dynamics
Calibrating the Correlation
Summary
Modelling Default Times using Copulas
Introduction
Definition and Properties of a Copula
Measuring Dependence
Rank Correlation
Tail Dependence
Some Important Copulae
Pricing Credit Derivatives from Default Times
Standard Error of the Breakeven Spread
Summary
Technical Appendix
Pricing Default Baskets
Introduction
Modelling First-to-default Baskets
Second-to-default and Higher Default Baskets
Pricing Baskets using Monte Carlo
Pricing Baskets using a Multi-Factor Model
Pricing Baskets in the Student-t Copula
Risk Management of Default Baskets
Summary
Pricing Tranches in the Gaussian Copula Model
Introduction
The LHP Model
Drivers of the Tranche Spread
Accuracy of the LHP Approximation
The LHP Model with Tail Dependence
Summary
Technical Appendix
Risk Management of Synthetic Tranches
Introduction
Systemic Risks
The LH+ Model
Idiosyncratic Risks
Hedging Tranches
Summary
Technical Appendix
Building the Full Loss Distribution
Introduction
Calculating the Tranche Survival Curve
Building the Conditional Loss Distribution
Integrating over the Market Factor
Approximating the Conditional Portfolio Loss Distribution
A Comparison of Methods
Perturbing the Loss Distribution
Summary
Implied Correlation
Introduction
Implied Correlation
Compound Correlation
Disadvantages of Compound Correlation
No-arbitrage Conditions
Summary
Base Correlation
Introduction
Base Correlation
Building the Base Correlation Curve
Base Correlation Interpolation
Interpolating Base Correlation using the ETL
A Base Correlation Surface
Risk Management of Index Tranches
Hedging the Base Correlation Skew
Base Correlation for Bespoke Tranches
Risk Management of Bespoke Tranches
Summary
Copula Skew Models
Introduction
The Challenge of Fitting the Skew
Calibration
Random Recovery
The Student-t Copula
The Double-t Copula
The Composite Basket Model
The Marshall-Olkin Copula
The Mixing Copula
The Random Factor Loading Model
The Implied Copula
Copula Comparison
Pricing Bespokes
Summary
Advanced Multi-name Credit Derivatives
Introduction
Credit CPPI
Constant Proportion Debt Obligations
The CDO-squared
Tranchelets
Forward Starting Tranches
Options on Tranches
Leveraged Super Senior
Summary
Dynamic Bottom-up Correlation Models
Introduction
A Survey of Dynamic Models
The Intensity Gamma Model
The Affine Jump Diffusion Model
Summary
Technical Appendix
Dynamic Top-down Correlation Models
Introduction
The Markov Chain Approach
Markov Chain: Initial Generator
Markov Chain: Stochastic Generator
Summary
Useful Formulae
Bibliography
Index
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