Credit Risk

IFF Training

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IFF Training


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About the course

This course will start with an analysis of the credit risk counterparty and transaction-based models and move on to describing the models for evaluating a portfolio of counterparties. Key benefits of attending this course are:

  • Learn clear concise techniques to manage credit risk in portfolios, loans and instruments effectively
  • Cover the most commonly used models for assessing credit risk exposure
  • Improve your knowledge with in-depth analysis of portfolio performance and optimisation
  • Get to grips with the latest regulatory requirements & developments regarding Credit Risk, Basel II & Basel III and FRTB
  • Learn what challenges credit risk management faces and what you need to do to deal with these challenges effectively

How You Will Learn

Packed with case studies, exercises, computer workshops and discussions to give you a thorough grounding in techniques and strategies to manage credit risk

These include: Estimation of market factor volatilities; Spreadsheet exercises using simple portfolio credit model; Performing Cholesky decomposition; Analysis of a CDO in the sub-prime meltdown; Spreadsheet exercises with single name credit derivatives; Estimation of market factor correlations

Agenda Summary

Introduction to Fundamental Credit Risk and Analysis

  • What is credit risk and how does it arise?
  • Regulatory distinctions in credit risk – specific and counterparty / banking vs. trading book
  • The credit crunch and its origins – how has this affected our approach to credit risk?
  • Definitions of default, failure to pay and other credit events
  • Simple models of corporate structure, subordination and default processes
  • Merton’s enterprise model and default risk – KMV model
  • Credit risk as default probability, recovery rates / LGD and exposure
  • Relationship to balance sheet and cash flow statements
  • Relationships to debt and equity prices
  • Ratings agents approach to credit risk – has it failed?
  • Lessons to be learned from the credit crunch and sub-prime debacle
  • How did Lehman’s collapse? – relationships to liquidity and other risk

Portfolio Credit Risk

  • Probability of default, loss given default and correlation of default
  • Credit risk of portfolios compared with single positions
  • Loss distributions and relationship to expected loss, worst credit loss, economic and regulatory capital definitions
  • Introduction to portfolio credit risk models
  • CreditRisk+
  • CreditMetrics
  • McKinsey
  • Optimising portfolios for best risk/return
  • Tail risk

Computer Workshop Spreadsheet exercises using simple portfolio credit model

Overview of Basic Statistics

  • Some elementary statistics – standard deviation, Pearson correlation, skewness
  • Volatility of market factors
  • Covariance and correlation, correlation matrix
  • Problems with real-world data
  • Monte Carlo simulation methodology
  • Overview of Monte Carlo technique
  • Cholesky decomposition
  • Problems with the variance/covariance matrix

Exercise Estimation of market factor volatilities

Exercise Estimation of market factor correlations

Exercise Performing Cholesky decomposition

Modelling Credit Exposure of OTC Derivative Products

  • Loans, bonds and derivatives
  • Transaction-based models
  • Foreign exchange transactions
  • Interest rate swap transactions
  • CEF calculations
  • Effect of CMTM
  • Market factor-based models
  • Counterparty exposure simulation models
  • Handling credit exposure limits
  • Integration of netting
  • Integration of margin/collateral
  • Integration of liquidity risk
  • Stress testing
  • incremental transactions
  • market discontinuities
  • What lessons have we learned from the credit crunch with regard to stress
  • testing?

Evaluating the Credit Risk of Derivatives

  • Expected and unexpected credit loss
  • Default only versus economic loss
  • Credit loss profile
  • Simulation approach to economic capital
  • Risk rating model
  • Rating migration matrix
  • Loss given default

Managing Credit Risk: Securitisation and Risk Transformation

  • Concepts of regulatory capital for credit risk and return on assets
  • Techniques for moving risk off balance sheet
  • Securitisation and synthetic securitisation
  • CDOs and other tranche products
  • Pros and cons of securitisation for origination firms and investors
  • The role of rating agents
  • The roots and effects of sub-prime meltdown
  • How has the model broken down in the credit crunch?
  • What is going to replace it?

Case Study Analysis of a CDO in the sub-prime meltdown

Managing Credit Risk: Credit Derivatives and Risk Transfer

  • What are credit derivatives and why are they used?
  • Single name credit derivatives (unfunded and funded structures)
  • Credit Default Swap (CDS)
  • total return swap
  • first-to-default basket note
  • Pricing and risk of single obligor credit derivatives
  • Basket and Tranche CDS, index based CDS
  • Regulatory capital impacts of credit derivatives
  • Documentation and legal issues

Computer Exercise Spreadsheet exercises with single name credit derivatives

Regulatory Capital - Requirements for Credit Risk

  • Regulatory capital under Basel I
  • Regulatory capital under Basel II
  • Changes under Basel III
  • Standardised approach
  • Foundation internal ratings based approach
  • Advanced internal ratings based approach
  • Basel II / III risk weight functions
  • Basel trading book issues
  • Counterparty credit exposure
  • Double default effects
  • Short-term maturity adjustment
  • Unsettled trades
  • Wrong way risk
  • CVA, FVA and DVA – what are they and how do they affect us?
  • What changes can we expect in the future as a result of the credit crunch?


Andrew Street

Andrew Street was formerly Executive Director - Head of Arbitrage & prior to that, Director - Head of Equity & Commodity Derivatives at Mitsubishi Finance International (now bank of Tokyo-Mitsubishi). He has been a senior financial regulator including being Head of Traded Risk at the Fin...

Videos and materials

Credit Risk at IFF Training

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