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Edited By Angelo Arvanitis and Jon Gregory


Provides a consistent firm-wide platform for pricing, hedging and risk management of credit across a broad range of product classes.

Publish date: 1 May 2001

Availability: In stock

Product Unit Price Qty
Book - Credit

Book description

  • Emphasises fixed income instruments rather than loans, where stochastic future exposures are modelled accurately
  • Provides a thorough analysis of the pricing and hedging of basket credit derivatives and other credit contingent products
  • Examines loans, credit derivatives, interest rate derivatives with risky counterparties and convertible bonds
  • Adapts credit derivative modelling techniques in order to price and hedge the credit component in fixed income derivatives
  • It provides a practical discussion of market frictions that impact credit trading
  • Complex theoretical issues are illustrated with an unusually high number of examples, tables and figures that have been designed with the practitioner in mind
  • Proofs and technicalities are discussed in the appendices of each chapter

Book details

Book 9781899332731 / EBook 9781908823038
Publish date
1 May 2001
155mm x 235mm

Editor biography

Angelo Arvanitis and Jon Gregory

Table of contents




1 - Overview of Credit Risk

1.1 Components of Credit Risk

1.2 Factors Determining the Credit Risk of a Portfolio

1.3 Traditional Approaches to Managing Credit Risk

1.4 Market Risk versus Credit Risk

1.5 Historical Data

1.6 Example of Default Loss Distribution

1.7 Credit Risk Models

1.8 Conclusion

2 - Exposure Measurement

2.1 Introduction

2.2 Exposure Simulation

2.3 Typical Exposures

2.4 Conclusion

3 - A Framework for Credit Risk Management

3.1 Credit Loss Distribution and Unexpected Loss

3.2 Generating the Loss Distribution

3.3 Example - One Period Model

3.4 Multiple Period Model

3.5 Loan Equivalents

3.6 Conclusion


Derivation of the Formulas for Loan Equivalent Exposures

4 - Extensions of the General Framework

4.1 Analytical Approximations to the Loss Distribution

4.2 Monte Carlo Acceleration Techniques

4.3 Extreme Value Theory

4.4 Marginal Risk

4.5 Portfolio Optimisation

4.6 Conclusion


5 - Credit Derivatives

5.1 Default Swaps, Asset Swaps and Risky Bonds

5.2 Worst-of and Baskets

5.3 Other Credit Contingent Contracts

5.4 Other Products and Exotics

5.5 Conclusion

6 - Pricing Counterparty Risk in Interest Rate Derivatives

6.1 Introduction

6.2 Overview

6.3 Expected Loss versus Economic Capital

6.4 Portfolio Effect

6.5 Market Variables

6.6 Interest Rate Swaps

6.7 Cross Currency Swaps

6.8 Caps and Floors

6.9 Swaptions

6.10 Portfolio Pricing

6.11 Extensions of the Model

6.12 Hedging

6.13 Conclusion


Appendix A - Derivation of the Formula for the Expected Loss on an Interest Rate Swap

Appendix B - The Formula for the Expected Loss on an Interest Rate Cap or Floor

Appendix C - Derivation of the Formula for the Expected Loss on an Interest Rate Swaption (Hull and White Interest Rate Model)

Appendix D - Derivation of the Formula for the Expected Loss on a Cancellable Interest Rate Swap

Appendix E - Market Parameters used for the Computations

7 - Credit Risk in Convertible Bonds

7.1 Introduction

7.2 Basic Features of Convertibles

7.3 General Pricing Conditions

7.4 Interest Rate Model

7.5 Firm Value Model

7.6 Credit Spread Model

7.7 “Link“ of the two Models

7.8 Hedging of Credit Risk

7.9 Conclusion


Appendix A - Firm Value Model - Analytic Pricing Formulae

Appendix B - Derivation of Formulae for Trinomial Tree with Default Branch

Appendix C - Effect of Sub-optimal Call Policy

Appendix D - Incorporation of “Smile“ in the Firm Value Model

8 - Market Imperfections

8.1 Liquidity Risk

8.2 Discrete Hedging

8.3 Asymmetric Information

8.4 Conclusion


1. Credit Swap Valuation Darrel Duffie

2. Practical use of Credit Risk Models in Loan Portfolio and Counterparty Exposure Management Robert A. Jarrow and Donald R. van Deventer

3. An Empirical Analysis of Corporate Rating Migration, Default and Recovery Sean C. Keenan, Lea V. Carty and David T. Hamilton

4. Modelling Credit Migration Bill Demchak

5. Haircuts for Hedge Funds Ray Meadows

6. Generalising with HJM Dmitry Pugachevsky




Short listed for the Kulp-Wright Book Award for the most significant text in the field of risk management and insurance

“Professional risk managers and academics will benefit from reading this excellent book. It is well written, offers much valuable information and deserves to become a standard reference book... the authors have done a great job.“

Stuart Turnbull, Canadian Imperial Bank of Commerce, Risk magazine - December 2001

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