Introduction to Credit Markets

Measuring credit risk and analysis of credit spread

• Rating agencies
• Credit spread

• Practical workshop

• Construct an asset swap

Credit Default Swaps (CDS)

• Mechanics and quoting conventions
• Risks associated to CDS
• Legal documentation and clearing houses
• Arbitrage between bonds and CDS (negative basis trade)
• Trading strategies: long / short, yield curve, etc.

Tax and legal aspects

• ISDA master agreement
• Study of historical credit events (Lehman, Fannie Mae, etc.)
• Auction process for cash settlement

Regulatory framework

• Review of Basel II & III
• Credit derivatives regulations

iTraxx and CDX

• Mechanics and quoting conventions
• Impact of a default on the index
• Trading and hedging strategies

Other credit derivatives

• Credit Linked Notes (CLN)
• Total Return Swaps (TRS)

Derivatives on baskets

• Notion of default correlation
• First-to-default swap (FTD), Nth-to-default swaps
• Mark-to-Market risk vs. risk of default

Introduction to pricing

• Relationship between credit spread, default probabilities and recovery rate
• Construction of a risky curve

• Practical workshop

• Price a CDS

The CDO market

• Main principles of securitisation
• Cash CDO vs. synthetic CDO
• Arbitrage CDO vs. balance-sheet CDO
• Single tranche CDO and index tranches
• Correlation trading, delta-hedge
• 'Base correlation'

• Practical workshop

• Analyse equity capital allocation under Basel II
• Super senior tranches : the AIG case