Credit Risk & Bankruptcy

Catalog description

The objective of the course is to provide an introduction as well as an in-depth understanding of single-name derivative products, primarily the single-name credit default swaps (CDS), as also index products, with a focus on sovereign CDS index products. In addition, we will discuss other forms of credit derivatives such as Collateralized Loan Obligations, which issue bonds backed by a basket of leveraged loans. As with any derivatives course, the idea is to learn the key arbitrages between derivatives and cash markets well so that one knows when the arbitrage breaks down! Hence, the objective is to provide a balance between developing, on one hand, a sound conceptual framework and, on the other, market understanding and insight, especially with respect to liquidity and counterparty risk effects that are often so important in markets from a practitioner’s standpoint. I regard both as essential to the informed practitioner and academic. We will apply the tools by studying signs of market stress during the COVID-19 crisis and how Fed interventions alleviated the market turmoil in that period. In particular, the liquidity in the markets for government bonds will become important to understand as well, especially as COVID stimulus is being withdrawn. Along the way, we will look at methods to quantify the systemic risk of the financial sector and regulatory as well as market-based stress-testing of financial firms. Finally, we will also pay some attention to the ongoing concerns around zombie lending to corporates by bond markets given the Quantitative Easing by central banks both pre-COVID and post-COVID.