Active Credit Portfolio Management A Practical Guide to Credit Risk Management Strategies,9783527501984

Active Credit Portfolio Management A Practical Guide to Credit Risk Management Strategies

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Edition: 1st
ISBN13: 9783527501984
ISBN10: 3527501983
Format: Hardcover
Pub. Date: 2006-03-10
Publisher(s): Wiley-VCH
List Price: $167.11

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Summary

The introduction of the euro in 1999 marked the starting point of the development of a very liquid and heterogeneous EUR credit market, which exceeds EUR 350bn with respect to outstanding corporate bonds. As a result, credit risk trading and credit portfolio management gained significantly in importance. The book shows how to optimize, manage, and hedge liquid credit portfolios, i.e. applying innovative derivative instruments. Against the background of the highly complex structure of credit derivatives, the book points out how to implement portfolio optimization concepts using credit-relevant parameters, and basic Markowitz or more sophisticated modified approaches (e.g., Conditional Value at Risk, Omega optimization) to fulfill the special needs of an active credit portfolio management on a single-name and on a portfolio basis (taking default correlation within a credit risk model framework into account). This includes appropriate strategies to analyze the impact from credit-relevant newsflow (macro- and micro-fundamental news, rating actions, etc.). As credits resemble equity-linked instruments, we also highlight how to implement debt-equity strategies, which are based on a modified Merton approach. The book is obligatory for credit portfolio managers of funds and insurance companies, as well as bank-book managers, credit traders in investment banks, cross-asset players in hedge funds, and risk controllers.

Author Biography

<b>Dr. Jochen Felsenheimer</b> works for HVB Corporates &amp; Markets and is currently heading the Credit &amp; Credit Derivatives Strategy team, a department of HVB Global Markets Research. He holds a PhD in Economics from Ludwigs-Maximilians-Universit&amp;auml;t M&amp;uuml;nchen. <p> <b>Dr. Philip Gisdakis</b> is a Quantitative Credit Strategist. He studied Mathematical Finance at the University of Oxford and holds a PhD degree in Theoretical Chemistry from Technische Universit&amp;auml;t M&amp;uuml;nchen. <p> <b>Michael Zaiser</b> is a Credit Strategist at HVB Corporates &amp; Markets. He studied Business Administration and Mathematics at Johann Wolfgang Goethe-Universit&amp;auml;t Frankfurt am Main.

Table of Contents

Foreword 13(4)
Introduction and Acknowledgements 17(2)
Part I Markets
19(122)
Market Structure
21(24)
Market Development
22(5)
Historical Development
22(5)
Size and Growth of the Market
27(1)
Market Participants
27(4)
Banks
28(1)
Insurance Companies
29(1)
Funds and Asset Managers
30(1)
Retail Clients
30(1)
Hedge Funds
30(1)
Issuing Debt from a Company's Viewpoint
31(2)
Ratings and Rating Agencies
33(6)
Are Ratings an Efficient Source for Pricing Credits?
36(3)
Credit Classes
39(6)
High-Grade Universe
39(1)
High-Yield and Crossover Credits
40(1)
High-Quality Segment
41(1)
Asset Backed Securities
42(3)
Instruments
45(28)
Straight Bonds
45(2)
Bonds with Embedded Options
47(1)
Exotics
48(5)
Payment-in-Kind Notes
49(1)
Hybrids or Subordinated Corporate Bonds
50(3)
Hybrid Bank Capital
53(2)
Single-Name Credit Derivatives
55(7)
Credit Default Swaps
55(3)
Digital Default Swaps
58(1)
Equity Default Swaps
58(2)
Recovery Default Swaps
60(1)
Constant Maturity Credit Default Swaps
61(1)
Portfolio Credit Derivatives
62(8)
Basket/Index Swaps--iTraxx Europe Benchmark
62(3)
Default Baskets
65(2)
Standardized iTraxx Tranches
67(1)
Spread Options
68(2)
Future Contracts
70(1)
Outlook on Product Development
70(3)
Company and Debt Instrument Analysis
73(30)
Sovereign Risk and Government Support
74(1)
Business Risk
74(8)
Financial Risk
82(11)
Off-Balance-Sheet Adjustments
86(5)
Adjustment of Ratios
91(2)
The Rating Agencies' Methodology
93(3)
Evaluation of Specific Debt Instruments
96(3)
Recovery Rate Estimates
99(4)
The Economics of Credit Spreads
103(38)
Macro Drivers
103(12)
Credits in the Business Cycle
103(3)
Yields and Spreads
106(2)
Credits and Exchange Rates
108(1)
Credits and Commodity Prices
109(2)
Credits and Inflation
111(2)
Credits and External Shocks
113(2)
Micro Drivers
115(2)
Credit Quality
117(6)
Credit Quality Trend
117(1)
Default Rates
117(3)
Recovery Rates: The Collins & Aikman Case
120(2)
Implied Ratings
122(1)
Equity-Debt Linkage
123(13)
The Basic Merton Approach: Structural Models
123(5)
Merton in Practice
128(3)
Leap-Put Skewness as an Equity-Debt Indicator
131(2)
Empirical Evidence for the Equity-Debt Linkage
133(3)
Market Technicals
136(5)
Is there a New Issuance Premium?
137(1)
Technical Bid
138(1)
The Impact of Syndicated Loans on Corporate Bonds
139(2)
Part II Models
141(236)
Fixed Income Basics
143(28)
Basic Valuation Concepts
143(15)
The Discount Function
143(6)
Spot Rates and the Term Structure of Interest Rates
149(5)
Forward Rates
154(4)
Obtaining the Term Structure of Interest Rates
158(1)
The Yield to Maturity
159(3)
Measurement of Interest Rate Risk
162(9)
Spread Measures
171(24)
Basic Considerations
171(2)
Yield Spreads
173(4)
Z-Spreads
177(3)
Asset Swap Spreads
180(4)
Spread Measures for Floaters
184(2)
Spreads and the Real Economy
186(6)
Conclusion
192(3)
Basics of Credit Risk Models
195(42)
The Components of Credit Risk
196(2)
A Single-Step, Two-Stage Model
198(4)
A Multi-Step Model for Zero Coupon Bonds
202(6)
The Multi-Step Model
208(2)
Continuous-Time Approach
210(7)
Recovery Treatment
217(14)
Fitch's Recovery-Rating Methodology
228(3)
The Term Structure of Credit Spreads
231(6)
Single-Name Models
237(34)
Reduced-Form Models
238(12)
Binomial Tree Models for Default Risk
244(5)
Reduced-Form Models and Illiquid Claims
249(1)
Structural Models
250(10)
Rating-Based Transition Matrix Models
260(11)
Redefining the Default Event
265(6)
Portfolio Models
271(32)
The Loss Distribution and its Impact on Portfolio Derivatives
273(3)
Independent Defaults
276(6)
Default Dependency
282(6)
Term-Structure Effects
288(1)
Valuing First-to-Default Baskets
289(3)
Valuing CDO Tranches with the HLPGC Model
292(4)
Spread Dispersion
296(4)
Price Discovery versus Model Competition
300(3)
Valuation of Credit Derivatives
303(62)
Credit Default Swaps
304(18)
Discrete-Time Model
305(6)
Obtaining the Survival Probability Curve
311(3)
Forward CDS Valuation
314(2)
CDS Sensitivities
316(2)
Continuous-Time Model
318(1)
Bloomberg's CDSW Function
319(3)
Options on Credit-Risky Instruments
322(5)
Single-Name Credit Default Swaptions
323(3)
Index Swaptions
326(1)
CDS Indices
327(3)
nth-to-Default Baskets
330(7)
Collateralized Debt Obligations
337(20)
Standardized iTraxx Tranches
338(3)
Compound and Base Correlation
341(5)
Sensitivities of iTraxx Index Tranches
346(11)
Exotic Derivatives
357(8)
Equity Default Swaps
357(1)
Constant Maturity Structures
358(2)
Digital Default Swaps and Recovery Swaps
360(5)
Portfolio Risk Measurement
365(12)
Risk Measures
365(8)
Market Risk versus Credit Risk
365(2)
Value at Risk and Conditional Value at Risk
367(5)
Risk Components
372(1)
Credit Portfolio Models
373(4)
Part III Management
377(180)
Principles of Credit Portfolio Management
379(30)
The Role of ACPM in the Asset Allocation Process
379(7)
Management Styles: Passive or Active
386(3)
Passive Management
386(2)
Active Management
388(1)
Quantitative and Fundamental Credit Research
389(2)
Diversification in Credit Portfolios
391(2)
Credit Risk Management in an ALM Environment
393(1)
Credits in the Global Asset Allocation
394(3)
Increasing Importance of Credit-Risky Instruments
394(1)
Credits, Government Bonds, and Equities
395(2)
Building Blocks of Credit Portfolio Management
397(9)
Step 1: Investment Targets
398(2)
Step 2: Risk Factors
400(1)
Step 3: Economic Variables
401(1)
Step 4: Forecasting and Scenario Assessment
401(1)
Step 5: Sensitivities
402(1)
Step 6: Portfolio Optimization Analysis
403(1)
Step 7: Portfolio Adjustments
404(1)
Step 8: Performance Analysis
405(1)
Key Portfolio Figures
406(3)
Portfolio Allocation
409(22)
Indices
410(8)
The Function of Indices
410(1)
The iBoxx Index Universe
411(2)
Analyzing the RDAX
413(5)
Sector Allocation in a Markowitz Framework
418(3)
Quality Allocation
421(3)
Tools to Derive the Optimal Allocation
424(7)
Alpha and Beta
425(1)
The Shortcomings of a Beta Analysis
425(2)
Aggregated Z-Scores
427(1)
Equity Volatility as a Tool in the Allocation Process
428(3)
Performance Measures
431(6)
Tracking Error
432(1)
Sharpe Ratio and Treynor Ratio
433(2)
Information Ratio
435(1)
Summary
436(1)
Performance Analysis
437(6)
Return Accumulation
437(1)
Return Attribution Analysis
438(5)
Hedging Credit Risk
443(26)
Hedging on a Single-Name Level
443(9)
Basic Considerations
443(2)
Hedging Default Risk
445(3)
Hedging Spread Risk
448(4)
Hedging on a Portfolio Level
452(17)
Basic Considerations
453(1)
Hedging Systematic Spread Risk for a Single Cash Bond
453(5)
Hedging Systematic Spread Risk for a Credit Portfolio
458(4)
Finding the Right Hedging Instrument
462(7)
Trading Strategies
469(34)
Trading Cash Bonds
469(3)
Trading Strategies with Single-Name CDS
472(4)
Plain-Vanilla CDS Trades
474(1)
Switch Ideas
474(1)
Curve Trades
475(1)
Portfolio Derivatives Trades
476(13)
Single Name versus Sector or Market
476(1)
Core--Satellite Strategies
477(1)
Sector and Segment Trades
478(1)
Trading the Skew
479(2)
Basis Trades
481(1)
First-to-Default Baskets
482(3)
iTraxx Tranches versus Default Baskets
485(3)
Playing the Steepness of the iTraxx Curve
488(1)
Spread Options: Single and Complex Strategies
489(1)
CPPI Strategies Including iTraxx Indices
490(2)
Correlation Trading
492(2)
Capital Structure Arbitrage Trades
494(1)
Recovery Trades
495(1)
EDS versus CDS and the Role of DDS
496(4)
CDS--Cash-Repo Arbitrage
500(3)
The Repo Market
500(1)
How an Arbitrage Trade Works
501(2)
Operational Issues: Accounting
503(26)
An Introduction to IAS 39
504(14)
The Scope of IAS 39
504(1)
Categories of Financial Instruments
505(2)
Measurement
507(5)
Recognition and Derecognition
512(1)
Embedded Derivatives
513(2)
Hedge Accounting
515(3)
IAS 39 Accounting for Credit Instruments
518(11)
Bonds and Loans
518(3)
Credit Default Swaps
521(2)
Total Return Swaps
523(2)
Credit Linked Notes
525(1)
iTraxx Products
526(1)
Other Instruments of Interest
527(2)
Operational Issues: Basel II
529(28)
An Introduction to Basel II
529(18)
The Basic Structure
529(4)
The Standardized Approach
533(1)
The Foundation IRB Approach
534(4)
The Advanced IRB Approach
538(2)
Securitization Transactions
540(3)
Credit Risk Mitigation
543(4)
Basel II for Credit Instruments
547(10)
Credit Default Swaps
547(3)
Total Return Swaps
550(1)
Credit Linked Notes
551(2)
Default Baskets
553(2)
iTraxx Products
555(2)
Part IV Appendix
557(12)
Analytics with Bloomberg and Reuters
559(4)
Bloomberg
559(1)
Reuters
560(3)
Default and Recovery Data from Rating Agencies
563(6)
References 569(6)
Index 575

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