Credit Risk: Pricing, Measurement, and Management

By David Lando | Go to book overview

8
Credit Default Swaps, CDOs, and
Related Products

The market for credit derivatives is seeing rapid growth. According to a 2002 survey by the British Bankers’Association (BBA), the estimated size of the market by the end of 2002 was set at almost $2 trillion and the BBA expects the size of the market to reach $5 trillion by the end of 2004.

In this chapter we present the most important vehicles for transferring credit risk, namely variations of the default swaps and a class of asset-backed securities broadly referred to as Collateralized Debt Obligations (CDOs). In the BBA survey, so-called single-name default swaps accounted for almost half of the market volume in credit derivatives and almost a quarter of the volume was in “portfolio products/Collateralized Loan Obligations (CLOs).” This chapter will look at these most important classes of credit derivatives. The main purpose is to understand the fundamental structure of these instruments and how they interact.

We will also consider a few basic issues in building pricing models, but one should be aware that this area—as with corporate bonds in general—is rich in institutional detail. Hence the models tend to deal with stylized versions. As always, one hopes that the stylized structures overcome enough of the most important obstacles in modeling to make it relatively straightforward to build on the basic structures to accommodate particular institutional features. We will not derive more than a few analytical formulas. For multi-name contracts one usually ends up having to simulate the models anyway. We focus therefore on some basic calculations which are helpful for the simulations. Once simulations are called for, the worry then becomes what kind of correlation structure to impose, and this is the topic of the next chapter.


8.1 Some Basic Terminology

The market for credit risk transfer is rich with institutional details and we will not attempt to go into a lot of detail here. Rather, this section serves as an introduction to the most important structures and hints at their definitions and uses.

-197-

Notes for this page

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this book

This book has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this book

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this page

Cited page

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited page

Bookmark this page
Credit Risk: Pricing, Measurement, and Management
Table of contents

Table of contents

Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this book

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
/ 310

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.