Contents:

Author biographies viii Introduction 1 Credit derivatives: a revolution in the financial markets 2 The distinctive features of credit spreads 3 Credit swaps 5 Total return swaps 6 Spread options 7 Credit-linked notes 8 The Chase Secured Loan Note: a case study 9 Conclusion and market outlook Chapter 1 11 Credit derivatives in emerging markets: a product analysis 12 Access 12 Optimal exposure 12 Risk management 13 Structures and mechanics 13 Product analysis Chapter 2 23 The market participants: applying credit derivatives 23 Introduction 24 Credit derivatives for commercial banks 27 Credit derivatives for investment banks 29 Credit derivatives for institutional investors 31 Credit derivatives for the insurance/reinsurance industry 32 Credit derivatives for corporates 34 Summary and outlook Chapter 3 35 Risk management in a credit derivatives business 36 Types of credit derivatives 37 Sources of risk 44 The risk management process 51 Conclusion Chapter 4 53 The pricing of credit derivatives 53 Credit risk and credit derivatives 54 Pricing a default swap 55 Pricing procedures 61 Pricing a credit spread option 62 Summary Chapter 5 63 The convergence of the trading environment with the credit department 63 Introduction 63 The current role of the credit department 64 The role of the trading department 65 The impact of credit derivatives 66 Portfolio credit risk modelling 67 Internal risk models for capital 68 The future 68 Conclusion Chapter 6 71 Event risk management and arbitrage: synthetic credit structures 71 The diversification, pooling and transfer of credit risk via credit-linked investment vehicles 75 The principle of credit arbitrage: relative value in the pricing of credit risk 78 The role of asset volatility in valuing the option of default 79 Tranched and pooled structures: collateralised debt obligations 81 Emerging market collateralised bond obligations: market volatility, duration and the term structure of emerging market credit risk 83 Swap-dependent structures: insurance derivatives, price-indexed synthetics and credit derivative-linked debt issues 85 The evaluation of model performance 88 Entry: convergence between the credit and reinsurance markets 91 The use of credit derivatives to credit-wrap synthetic note structures 92 Rating credit-linked structured notes 93 Volatility and correlation (uncorrelated credit/default events) 94 Examples of simple credit derivatives, complex strategies and their rating implications 97 Default estimates and the indexing of credit risk Chapter 7 103 The regulatory environment 103 The current capital regime 106 Why the regulatory environment is important for credit derivatives 106 The United States: the Federal Reserve System's approach 109 The United Kingdom: the Bank of England's approach 110 France: the Commission Bancaire's approach 112 ISDA, LIBA and BBA: reactions to regulators' approaches Chapter 8 117 Accounting for credit derivatives: US Generally Accepted Accounting Principles 117 Introduction 117 Intent 118 Credit default products 121 Total return swaps 123 Disclosure 125 Accounting developments Chapter 9 127 Euro cash and euro futures markets: a look into the next millennium 127 The equity markets 128 The eurobond market 128 The futures markets 129 The role of a euro benchmark bond 129 The drawbacks of basket contracts 130 Creditworthiness and interest rate spreads 131 Trading systems and new products 131 Success factor liquidity 132 Europe's futures exchanges: cooperation or competition? 133 Market efficiency in the future Appendix 135 Update of the 1997/98 BBA Credit Derivatives Survey