Credit Derivatives: A Primer on Credit Risk, Modeling, and Instruments

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Product Description

The credit risk market is the fastest growing financial market in the world, attracting everyone from hedge funds to banks and insurance companies. Increasingly, professionals in corporate finance need to understand the workings of the credit risk market in order to successfully manage risk in their own organizations; in addition, some wish to move into the field on a full-time basis. Most books in the field, however, are either too academic for working professionals, or written for those who already possess extensive experience in the area. Credit Derivatives fills the gap, explaining the credit risk market clearly and simply, in language any working financial professional can understand. Harvard Business School faculty member George C. Chacko and his colleagues begin by explaining the underlying principles surrounding credit risk. Next, they systematically present today's leading methods and instruments for managing it. The authors introduce total return swaps, credit spread options, credit linked notes, and other instruments, demonstrating how each of them can be used to isolate risk and sell it to someone willing to accept it.

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Credit Derivatives: A Primer on Credit Risk, Modeling, and Instruments Review

I quite enjoyed this book and recommend it strongly for any business student (BBA or MBA) who is interested in this topic. For finance majors who don't have a firm grip on credit risk and the instruments used to moderate its effects, this is a must read. It is well written, clearly illustrated, and is not excessively technical.

The six chapters are divided into three parts. 1) What is Credit Risk, 2) Credit Risk Modeling, and 3) Typical Credit Derivatives. The introduction and chapter on credit risk are especially helpful to anyone wanting to gain a more nuanced understanding of what credit risk is.

The middle chapters comprising part 2 discuss the Merton model and options in discussing how credit risk can be evaluated and priced. There are appendices that discuss other models. For the purposes of this book, the discussion here is enough. As a primer, it cannot also be the last word in the technical evaluation of the various kinds of risk and there are other books for the more sophisticated audience (as well as journal articles).

Credit Swaps and Collateralized Debt Obligations are discussed in a few flavors each as the typical credit derivatives. Sometimes people get intimidated or confused by derivatives. However, they are simply other kinds of financial mechanisms that create financial obligations depending on some aspect of the performance of some other instrument. You buy or sell them depending on whether you want to lay off risk and variability to someone else or are willing to buy risk in order to collect the premium and add variability to your portfolio.

A good little book for the right audience.

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