Credit Risk
Objectives
This course covers the main concepts and techniques required to manage
the risk of portfolios of credit-sensitive assets, such as corporate bonds or
loans. We will also learn how to use credit derivatives to manage credit risk,
focusing particularly on Credit Default Swaps. Finally, we will study more
complex structures, such as Collateralized Debt Obligations, which were at the
forefront of the financial crisis of 2008. The materials covered in this course
are relevant to commercial and investment banks and to any large firm with
credit-sensitive assets.
A.Knowledge
& Understanding
1.Understand
the main drivers of credit risk
2.Know
the main techniques used to measure & manage credit risk
B.Subject-Specific
Skills
1.Estimate
probabilities of default
2.Compute
the Credit Value-at-Risk of a bond portfolio
3.Price
&use credit derivatives
C.General
Skills
1.Improve
analytical thinking
2.Use
IT tools available to managers
3.Financial
theories & markets
General characterization
Code
14512
Credits
3
Responsible teacher
João Pedro Pereira
Hours
Weekly - Available soon
Total - Available soon
Teaching language
Portuguese | English
Prerequisites
Available soon
Bibliography
A set of handouts will be distributed in class.
The
following additional references may be helpful:
1.
Lando, 2004, Credit Risk Modeling, Princeton University Press.
2. Smithson,
C., 2003, Credit Portfolio Management, Wiley.
3.
CreditMetrics - Technical Document, JP Morgan, 1997.
4.
Chaplin, 2010, Credit Derivatives, Wiley.
5.
Schönbucher, P.J., 2003, Credit Derivatives Pricing Models: Model, Pricing and
Implementation, John Wiley & Sons.
Teaching method
T. Teaching Methods. The course will follow a standard lecture mode,
where we will:
1.
Discuss the theory of each topic.
2.
Solve small applied problems.
L.
Learning Methods. The recommend learning methods are:
1.
Reviewing the content of the lectures and related bibliography.
2.
Solving larger take-home projects.
Evaluation method
The assessment of this curricular unit is done together with the block
of curricular units of the same area of knowledge. This assessment has 3
moments, which together define the final grade of the CU:
•Individual
exam with a weighting of 50% of the total mark
•Group
work with a weighting of 35% of the total grade value
•Individual
reflection-action exercise carried out at the end of the curricular unit, with
a weighting of 15% of the total grade value. The set of individual
action-reflection exercises is a journaling activity, which will constitute, at
the end, a learning portfolio capable of synthesising the contributions of the
Executive Master for that student.
Subject matter
1. Foundations for credit risk modelling
Default loss; exposure; loss given default;
probability of default; portfolio default loss.
2. Estimation of default probabilities
Agency credit ratings; credit scoring and
internal rating models.
3. Structural approach to credit risk
Merton’s model; Moody’s-KMV EDF
4. Portfolio models
Credit migration approach (CreditMetrics)
5. Valuing defaultable bonds
Credit spreads (G, I, Z); Risk-neutral pricing
6. Credit derivatives
Credit default swaps (CDS); credit spread
options; total return swaps; credit-linked notes.
7. Collateralized Debt
Obligations