7CCMFM10 Credit Risk Management
Lecturer: Dr Avraam Rafailidis
Credit level: 7 Credit Value: 15
MSc Financial Mathematics
MSc Theoretical Physics
Undergraduate students are prohibited from taking Financial Maths modules which are modules commencing with 7CCMFM, except 7CCMFM01U
Single name credit products: Defaultable Bonds, Credit Default Swaps (CDS); CDS spreads, CDS options and other CDS based products. Single name models: Reduced Form. Poisson processes: Default as first jump, Intensity as credit spread level, Stripping deterministic intensities from CDS or bond quotes, market implied default probabilities. Cox Processes, Intensity diffusion coefficient as credit spread volatility, stochastic intensity models. Brief hints at market models for CDS options. Single name models: Structural. Merton's model, Black and Cox model, CDS and structural models. Multi name credit derivatives: Credit Indices, First to default baskets, N-th to default, CDO tranches. Multi name reduced form models: Introducing dependence in defaults. Introduction to copula functions: Gaussian copula, First and n-th to default with copulas, CDO's with copulas and Factor copulas. Large Homogeneous Pool (LHP) approximation and its drawbacks. Implied correlation in index tranches: Compound correlation and base correlation. Criticism of Copula functions applied to CDOs and of implied correlation. Dynamic Loss Models. Hints at the Generalized Poisson Loss (GPL) model for simultaneous tranche calibration across attachments and maturity. Counterparty Credit risk: Definition, unilateral and bilateral risk. Wrong way risk. Example of counterparty risk pricing on Interest Rates swaps, oil swaps and Credit Default Swaps.
Two hours of lectures per week
2 hr written examination
Regular exercise work is essential for success in this module.
The module will be based mainly on lecture notes and on the following books:
T. R. Bielecki and M. Rutkowski (2004). Credit Risk: Modelling, Valuation and Hedging, Springer Verlag.
D. Brigo (2006). Interest Rate Models: Theory and Practice - with Smile, Inflation and Credit, 2nd Edition, Springer Verlag.
D. Brigo, A. Pallavicini and R. Torresetti (2010). Credit Models and The Crisis: A journey into CDOs, Copulas, Correlations and Dynamic Models, Wiley.
A useful general resource is the webpage www.defaultrisk.com which has links to many academic papers, journal articles on the subject, books on credit risk, and other information