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Mastering Credit Derivatives: A step-by-step guide to credit derivatives and structured credit, 2nd Edition

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Mastering Credit Derivatives: A step-by-step guide to credit derivatives and structured credit, 2nd Edition


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  • This second edition is fully updated to include structured credit products in addition to 'standard' derivatives.
  • Includes input from market practitioners of where they believe the market is headed,
  • This book will ensure you have the ability, speed and confidence to manipulate and apply the skills and techniques relevant to your marketplace.


  • Copyright 2008
  • Dimensions: 6 X 9
  • Pages: 296
  • Edition: 2nd
  • Book
  • ISBN-10: 0-273-71485-6
  • ISBN-13: 978-0-273-71485-9

This second edition of Mastering Credit Derivatives has been completely revised to include new movements in the world of finance. The first part of the book is set aside as a condensed, updated version of the previous edition whereas the next two thirds are dedicated to recent innovations such as Structured Credit Derivatives and Greeks and Tranche Sensitivity.

The book is written on a purely ‘need to know’ basis, avoiding the archaic, theoretical and excessively mathematical concepts.

Input from market practitioners offers valuable insight into where they believe the market is headed in the future. Derivatives is a huge area, thought to be worth trillions of pounds. With new products being constantly introduced, it is important to keep up-to-date with its rapid growth.

Sample Content

Table of Contents

Mastering Credit Derivatives, 2e

Part 1:- Introduction to Credit Derivatives & Applications

Chapter 1:- Introduction to Credit Derivatives

Exhibit 1:-Credit Default Swaps

Exhibit 2:-CLNs

Exhibit 3-TROR Swaps

Chapter 2 :-Credit Derivatives & Applications

Exhibit 1:-Credit Default Swap Applications, Balance Sheet, Hedging, curve credit views

Exhibit 2:-CLNs Applications

Exhibit 3-TROR Swaps applications, Balance Sheet

Chapter 3:-CDS Basis

Chapter 4:-Pricing CDS

Chapter 4:-ISDA Documentation &  Basel II Credit Derivatives Regulations

Part 2 Structured Credit Derivatives

Chapter 6:-Traunched Indices

Credit Default Swap Indices

Exhibit 1:-DJ CDX Investment Grade Index

Important Characteristics of Benchmark Indices

Determining the upfront payments

Impact of Defaults on Index Cashflows

Exhibit 2:-Impact on Default on Index

Traunches of Standard Default Swap Indices

Important characteristics of benchmark traunches

Exhibit 3:-Traunched DJ CDX NA IG

Exhibit 4:-Credit Index CPPI strategies

Chapter 7:- What is Correlation?

“One mans delta is another man’s correlation”                               

                                                            -Chris Boas


Exhibit 1:-Portfolio Volatility Affected by Correlation

Correlation In Structured Credit Markets

Observing Default Correlation

The Hidden Meaning of Correlation in Credit Markets

Exhibit 2:-Correlation Affects the Relationship Between Volatility and Portfolio size

Exhibit 3:-Valuation in structured credit markets

Exhibit 4:-Correlation Creates Portfolio loss Distribution with fatter tails

Exhibit 5:-Implied Compound and Base Correlation

Exhibit 6:-correlation Sensitivity varies with seniority

Exhibit 7:-Traunche Equivalence – Long/short combinations

Chapter 8:-First-to-Default Baskets

Overview of Default Basket Primer

Exhibit 1:-First to Default Swap

Exhibit 2:-Basket Default Swap Premium Depends on Correlation

First-to-default basket: Investor Motivation

Exhibit 3 Investor Motivation for Basket Trading

Mergers & FTD Baskets

Exhibit 4:-Replacement language matters – Impact of a hypothetical merger between Credits 1 & 2.

Exhibit 5:-What is the impact of a Merger Worth?

Funded Baskets

Example: Ex-HiVol First to Default Basket

Ex HiVol Benchmark First to Default Basket

Chapter 9:-Cash CDO’s


Exhibit 1:-Growth in CDO issuance

Exhibit 2:-CDO’s in the context of overall ABS Market

Exhibit:-A Comparison of collateral composition of CDO Issuance 1998 and 2004

What are Cash CDO’s?

How do Cash CDO’s work?

Exhibit 3:- How a typical Cash CDO works

Cash CDOs: A taxonomy

Understanding the basics of CDO equity returns

Rating of CDOs

Analytical Challenges in modelling cash CDOs

Chapter 10:-Synthetic CDO’s


Exhibit 1:-Global Total Synthetic CDO Issuance

What are Synthetic CDO’s?

Exhibit 2:-How a typical CDS works

Exhibit 3:-How a typical Synthetic CDO works

Attachment & Detachment Points

Why Synthetic CDOs?

Taxonomy of synthetic CDOs

Exhibit 4:-Structure of a Typical Unfunded Synthetic CDO

Exhibit 5:-Structure of a Typical Funded Synthetic CDO

Analytical Challenges in Modelling Synthetic CDOs

New Developments in Synthetic CDOs

Exhibit 6:-Key Innovations, or Those that Show Promise

CDO Squared

CDO squared a brief history lesson

Exhibit 7:-Anatomy of a CDO Squared

Part 3  Greeks & Traunch Sensitivity

Chapter 11:-Understanding Traunche Sensitivity


Exhibit 1:-Summary of Greeks

Traunches as options on default

Sensitivity to spread changes or delta

Exhibit 2:-Spread sensitivity

Sensitivity to spread distribution changes or ‘I-Gamma’

Exhibit 3:-Insurance Moves to the Right, Impacting both senior and subordinate traunches.

Data Migration

Exhibit 4:-Traunch Pricing Impact: Two opposite examples

Exhibit 5:-Delta Sensitivity 5 year IG DJ CDX

Exhibit 6:-Delta Sensitivity 10 year IG DJ CDX

Exhibit 7:-Delta Sensitivity over time – 5 year IG DJ CDX

Exhibit 8:-Delta Migration over time

M-Gamma or convexity

Exhibit 9:-5 yr IG – Traunche Convexity (Delta Neutral)

Exhibit 10:-10 Yr Traunche Convexity (Delta Neutral)

Exhibit 11:-Mezanine Traunche Sensitivity

Jump to Default Sensitivity



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