Credit Risk and Credit Derivatives - Part II von Edu Pristine

Dozent des Vortrages Credit Risk and Credit Derivatives - Part II

Edu Pristine

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... a risky bond and the yield on a treasury bond. Both the bonds should have same maturity to calculate the credit spread. Credit spread is calculated ...

... the face value of senior and subordinate debt respectively. Equity (S) is valued as a call option on the value of the firm with strike price of F+U. Subordinate debt can be valued as a ...

... a decreasing function of time to maturity, volatility and interest rate. In times of no financial distress, the value of subordinate debt is a decreasing function ...

... the interest rates is high. Application difficulties. Application of Merton model is complicated the complexity in the capital structure of the firm. Merton Model ...

... Each obligor has a different weight to each of the common risk factors. This model allows for only two outcomes – Default and Non-default. Risk factors can only take positive values ...

... computing the expected value for one year. 4.Use one year forward zero curve rates to get the current price of the zero coupon bond. 5.Assume annual coupons to compute the value of the bond ...

... bond is BBB and the bond matures in 5 years. The bond pays a coupon of 5% and has the face value if $100. The current market price of the ...

... also allows for complicated capital structures. The main advantage of KMV model is that it uses the current ...

... This model estimates and econometric model for an index that drives the default rates for an industrial sector. User can select inputs for the econometric models . ...

... changes in interest rates, credit spreads and the current economic conditions. Credit risk models that use ...

... depends on a specific credit event. Credit events include the failure to make required payments, restructuring, bankruptcy etc. Credit derivatives are ...

... exercise price equal to the face value of debt. To hedge the credit risk, the bond holder can buy a credit default put on the value of the firm with an exercise price equal to the debt's ...

... credit exposure from a risky debt claim will buy a CDS from another party. The party with credit exposure will make ...

... include capital gains or losses and any cash flows over the life of swap. Total return payer payments would be ...

... default holder of the option receives: The vulnerable option holder received the promised payment only if the value of the counterparty firm, V, is greater ...

... default of 15% and the recovery rate of 50%. ...

... payment received will be lesser of the difference between the net payments or value of the counterparty. The payoff of the swap is same as a portfolio of short position on a put option and a long position on a call ...