Credit Derivative Strategies E-Book

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Bloomberg Professional
• Sprache: Englisch

Seitenzahl: 272

Veröffentlichungsjahr: 2010

Beschreibung

In the decade since the credit derivatives market started,financial professionals have become increasingly sophisticated.Most books on the subject have not kept pace. CreditDerivative Strategies closes the gap with state-of-the-arttechniques for picking credit hedge funds, analyzing event risk,identifying relative value opportunities and managing CDOs. The credit crisis has many people in the financial industryrethinking how to manage their credit risk and exposure. It is nowmore important than ever for participants in the financial markets-- whether they are trading or not -- to understand these creditproducts given their increasing impact. The contributors to this book are practicing professionals whohoned their craft at some of the industry's most successfulcompanies including: Merrill Lynch, Credit Suisse First Boston,Kenmar Global Investment Management, and Citigroup.

Leseprobe

Table of Contents

Praise

Title Page

Copyright Page

ABOUT THE CONTRIBUTORS

Introduction

PART ONE - INVESTMENT STRATEGIES

CHAPTER 1 - Eight Relative Value Opportunities

The Investment Process

Strategies

CHAPTER 2 - Distressed Debt Strategies

CHAPTER 3 - Four Synthetic CDO Trading Strategies

Elementary Portfolio

CDO Portfolios

- Default

Credit Spread

Tranche Pricing Correlation

Trading P&L Case Study

Summary

CHAPTER 4 - Integrating Credit Hedge Funds into a Portfolio of Investments

Credit Hedge Fund Strategies

Performance Profiles

Risk Management and Transparency

Correlations and Diversification

Portfolio Construction

Liquidity and Leverage

Valuation

Sustainability and Scalability

PART TWO - RISK MANAGEMENT STRATEGIES

CHAPTER 5 - Risk Management of Credit Derivatives

A Lexicon of Risks

Single-Name Credit Default Swap

Synthetic CDO

CHAPTER 6 - Risk Management for Multistrategy Funds

Structure

Investment Restrictions

Risk Management

Allocation of the Portfolio

Portfolio Monitoring Tools

Summary

CHAPTER 7 - Integrating Event Risk in Portfolio Construction

Section 1: Defining Measures of Risk

Section 2: Bottom-Up Methodology

Is the Current Portfolio Optimal?

Risk Budgeting or Top-Down Methodology

Summary

PART THREE - PRICING, PRODUCTS, AND PROCEDURES

CHAPTER 8 - Pricing Models

Introduction

CHAPTER 9 - CDS Valuation

Example 1

Example 2

CHAPTER 10 - CDO Valuation

Default Mechanism

Conditional Individual Loss Density

Conditional Portfolio Loss Density

Convolution Integral of Conditional Portfolio Loss Density

Tranche Valuation

Numerical Implementation

Compound and Base Correlation

CHAPTER 11 - Credit Derivative Products

Credit Derivative Defined

Asset Swaps

Total Return Swaps

Credit Default Swaps and Options

Credit Spread Forward and Option

Asset Swap Option

Credit-Linked Notes

Principal-Protected Notes

First-to-Default Basket Options and Swaps

Fully Funded Synthetic CDO

Partially Funded Synthetic CDO

Synthetic Arbitrage CDO

Resecuritizations

Index Products

INDEX

ABOUT BLOOMBERG

Praise for

CREDIT DERIVATIVE STRATEGIES

New Thinking on Managing Risk and Return EDITED BY Rohan Douglas

“The Credit Derivative Strategies guide is a great read for the experienced derivatives professional or those just starting out in the space. Both the core concepts of the derivatives market as well as the more complex CDO trading strategies come across with great lucidity. The guide would be a great complement to anybody’s investment library.”

BRETT M. GEARING Director, Structured Credit Products and Investments, Babson Capital Management LLC

“So rapid has been the growth of the credit derivatives market that it has outpaced the publication of educational material on the topic. Where texts do exist, they often carry an academic slant of limited application to the products and strategies employed by more market participants today. This well-researched volume goes a significant way toward addressing that imbalance. Written by practitioners with a wealth of both sell- and buy-side experience, it combines a rigorous approach to product pricing and valuation with chapters on the equally important—but much less often seen—topics of risk management and investment strategy. It like- wise covers not only plain-vanilla CDS and options, but also explains how to both price and handle the tail risk inherent in CDO tranches. I recommend this book to portfolio managers, traders, risk managers, and researchers alike.”

MATT KING Head of Credit Products Strategy, Citigroup

“An excellent mix of quantitative tools and in-depth examples”

FRANCIS A. LONGSTAFF Allstate Professor of Insurance and Finance, UCLA Anderson School of Management

“The rapid development of derivatives on credit products in the last decade has greatly facilitated the ability of participants in global capital markets to efficiently exchange credit risk. This has contributed to economic growth by increasing the efficiency of the market for users of capital. The insights into the latest evolutions of these products, contained in this book, provide an invaluable resource for a broad range of market participants and observers.”

STEPHEN WEST Founding Partner, TriPoint Asset Management

“Credit Derivative Strategies meets the challenge of bringing financial analysts and risk managers up to date on valuation, risk assessment, and product design in the fast-moving market for credit derivatives. The chapters are well selected for a mix of pragmatic institutional knowledge, conceptual frameworks, and technical foundations. I recommend it highly.”

DARRELL DUFFIE Dean Witter Distinguished Professor of Finance, Codirector of the Credit Risk Executive Program, Graduate School of Business, Stanford University

ALSO AVAILABLE FROM BLOOMBERG PRESS

The Credit Default Swap Basisby Moorad Choudhry

Fixed-Income Securities and Derivatives Handbook:Analysis and Valuationby Moorad Choudhry

Inside the Yield Book:The Classic That Created the Science of Bond Analysisby Sidney Homer and Martin L. Leibowitz, PhD

Introduction to Option-Adjusted Spread Analysis:Revised and Expanded Third Edition of the OAS Classic by Tom Windasrevised by Tom Miller

Hedge Fund Risk Fundamentals:Solving the Risk Management and Transparency Challengeby Richard Horwitz

A complete list of our titles is available at www.bloomberg.com/books

ATTENTION CORPORATIONS

This book is available for bulk purchase at special discount. Special editions or chapter reprints can also be customized to specifications. For information, please e-mail Bloomberg Press, [email protected], Attention: Director of Special Markets, or phone [phone].

© 2007 by Rohan Douglas. All rights reserved. Protected under the Berne Convention. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher except in the case of brief quotations embodied in critical articles and reviews. For information, please write: Permissions Department, Bloomberg Press, 731 Lexington Avenue, New York, NY 10022 or send an e-mail to [email protected].

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The Chartered Financial Analyst® (CFA®) designation is a globally recognized standard for measuring the competence and integrity of investment professionals.

This publication contains the authors’ opinions and is designed to provide accurate and authoritative information. It is sold with the understanding that the authors, publisher, and Bloomberg L.P. are not engaged in rendering legal, accounting, investment-planning, or other professional advice. The reader should seek the services of a qualified professional for such advice; the authors, publisher, and Bloomberg L.P. cannot be held responsible for any loss incurred as a result of specific investments or planning decisions made by the reader.

Library of Congress Cataloging-in-Publication Data

Credit derivative strategies : new thinking on managing risk and return / edited by Rohan Douglas. p. cm.

Summary: “Credit Derivatives are financial contracts that transfer credit risk--the risk that a debtor will not repay a loan--between parties. Credit Derivative Strategies describes for professional investors current ways of participating in this rapidly expanding market, including how to select credit hedge funds, analyze event risk, find relative value opportunities, and choose synthetic collateralized debt obligations (CDOs)”--Provided by publisher.

Includes bibliographical references and index.

ISBN 978-1-57660-187-7 (alk. paper)

1. Credit derivatives. 2. Risk management. I. Douglas, Rohan.

HG6024.A3C737 2007

332.63’2--dc22 2007014284

ABOUT THE CONTRIBUTORS

Rohan Douglas, editor of this volume, is the founder and CEO of Quantifi Inc., a leading provider of pricing models and risk analysis tools for structured credit. He has more than twenty-five years of experience in the global financial industry. Prior to founding Quantifi, he was the director of global credit derivatives research at Citigroup and Salomon Smith Barney where he worked for ten years. Douglas has worked in interest-rate derivatives, emerging markets, and global fixed income. Douglas is also an adjunct professor in the financial engineering program at Polytechnic University in New York and at the Macquarie University Applied Finance Centre in Australia and Singapore. For many years, Douglas has spoken at conferences and seminars on the subject of credit derivatives.

Santa Federico is the chief risk officer for Perry Capital, a $13 billion multistrategy hedge fund. Prior to working at Perry Capital, he was managing director of strategic risk management at Credit Suisse First Boston and head market risk manager for Salomon Smith Barney/Citigroup. Besides risk management, he has held various positions in portfolio management, derivatives trading, and quantitative research. He has twenty years of financial industry experience and holds degrees in physics from Princeton University and the École Centrale de Paris.

Alla Gil has fourteen years of financial experience working at major banks, such as Citigroup, Goldman Sachs, and CIBC. Most recently, she was the managing director of International Capital Solutions Group for Nomura Securities International. Her group developed innovative and practical financial solutions by quantifying clients’ exposures to different risk facets and identifying the most efficient risk mitigation strategies.

Richard Horwitz is the managing director of manager assessment and risk management of Merrill Lynch’s Hedge Fund Development and Management Group (HFDMG). He has implemented Risk Fundamentals, a proprietary risk transparency and management system. He was formerly a senior vice president of risk management and investment analytics at Kenmar Global Investment Management Inc., a $2 billion fund of funds. Horwitz previously worked as a principal and research analyst for Capital Market Risk Advisors, Sanford C. Bernstein & Co., and Booz Allen & Hamilton, Inc. He is also the author of Hedge Fund Risk Fundamentals: Solving the Risk Management and Transparency Challenge, published by Bloomberg Press in 2004.

Vivek Kapoor is an executive director at UBS, responsible for analyzing structured credit trading for UBS’s alternative investment management business, Dillon Read Capital Management. His central focus is evaluating trading and hedging strategies and developing relative value metrics that are cognizant of the limits of replication. Prior to working at UBS, he was the risk manager for CDO trading at Credit Suisse where he was responsible for analyzing and communicating the risk-return profile of CDO trading. He obtained his PhD from the Massachusetts Institute of Technology in the area of stochastic modeling of geophysical flows and solute dispersion.

Christoph Klein, CFA, is the head of credit fixed income and a partner of TriPoint Asset Management, which manages a multistrategy hedge fund. He was formerly the director of portfolio management at CPM Advisors Limited, where he managed a multistrategy credit hedge fund and was responsible for issuer credit analysis and instrument selection. Before that, Klein was portfolio manager for corporate and convertible bond mandates at Deutsche Asset Management in Frankfurt. He is currently pursuing a PhD at Trier University, and wrote the chapter “Analysis and Evaluation of Corporate Bonds” for the Handbook of European Fixed Income Securities.

Steven D. Persky has more than twenty-five years of professional investment experience. In 1998, he cofounded Dalton Investments with Jamie Rosenwald and managed Dalton’s distressed debt funds. He oversees U. S. operations for Dalton Investments LLC and serves as risk manager as well as manages Dalton’s Private Client Services, which provide investment counseling and investment management to high-net-worth clients. Prior to founding Dalton, he was a vice president at Payden & Rygel, a Los Angeles-based investment advisory where he managed institutional fixed-income portfolios. He also worked for Salomon Brothers in New York and Tokyo in the fixed-income trading division. Persky holds an AB from Harvard College (1980) where he majored in Asian Studies. He is a CFA charter holder (1994) and a member of the CFA Society of Los Angeles, Inc. and the CFA Institute.

Andrea Petrelli is the director of CDO trading risk management for Europe at Credit Suisse in London. His focus is portfolio credit derivatives valuation and risk modeling, and credit correlation. Prior to this, he worked at Banca Intesa, a major Italian bank, where his work was mainly devoted to credit derivatives modeling. He graduated from the University of Pisa where he also obtained his PhD in theoretical physics. He wrote his thesis on perturbative quantum chromodynamics at the CERN TH Division.

Peter Rivera is currently the department head of Business Technologies at the State University of New York in Dutchess County. After working as a certified public accountant, programmer, and mortgage securities trader, Rivera’s career in credit risk management began when he joined a quantitative risk group within Bankers Trust’s credit department in 1988. He joined Salomon Brothers in a similar capacity in 1993, and in 1997 accepted a position at Deutsche Bank as managing director responsible for managing the credit risk of all traded products as well as the RAROC methodology for customer-level and firm-wide credit risk. In 2002, he established Theory & Reality Risk Management to provide consulting and training in credit risk management. Rivera has a BS in accounting from Fordham University and an MBA in finance from New York University.

Erin Roye Simpson joined Merrill Lynch in February 2006, to perform risk analysis and aid in the development and implementation of risk-management tools in the Hedge Fund Development and Management Group. Prior to joining Merrill, she spent a year and a half at the Kenmar Fund as a member of the research team, where she performed quantitative research and aided in portfolio construction. She developed a system that helps construct portfolios and better understand portfolio risk. She graduated with honors from Yale University with a BS in astrophysics and has an MS in information and telecommunication systems from Johns Hopkins University.

Jun Zhang is the head of CDO risk management for the United States at Credit Suisse. He monitors risk for both synthetic and cash CDOs, such as spread, default, and correlation risks. Before joining Credit Suisse, he was a credit-risk quantitative analyst at Tokyo Mitsubishi Financial Group where he performed portfolio analysis of credit derivatives products. He speaks regularly at trading and risk management conferences. He holds a BS in engineering from Shanghai Jiao Tong University in China, an MS in mathematics in finance from New York University, and a PhD in engineering from Johns Hopkins University.

INTRODUCTION

ROHAN DOUGLAS

CREDIT DERIVATIVES are a relatively recent innovation, but they have already dramatically altered the playing field in finance. From origins in the U.S. high-yield market in the late 1980s and emerging markets in the early 1990s, the global credit derivatives market has roughly doubled each year, reaching an estimated $34.5 trillion notional outstanding as of the end of 2006.1 It is useful, however, to put the size of this market in perspective: it is still only one-tenth the size of the global interest-rate derivatives market and has a huge potential for future growth.

Credit derivatives are financial contracts whose value is derived primarily from an underlying asset or market quote that incorporates credit risk. Credit derivatives come in many shapes and forms and continue to evolve rapidly. Some are structured like bonds or notes (funded), and some are structured like swaps (unfunded). The payoff can be any function of a wide variety of underlying assets or market quotes including bonds or loans, credit spreads, ratings, or defaults. Credit derivatives are primarily over-the-counter products, but exchange-traded contracts have been introduced. What is common among all these forms is that their primary purpose is the transfer of credit risk from one party to another.