CREDIT RISK TOOLS: AN OVERVIEW

  • Francesco P. Esposito

Abstract

This document presents several Credit Risk tools which have been developed for the Credit Derivatives
Risk Management. The models used in this context are suitable for the pricing, sensitivity/scenario analysis and
the derivation of risk measures for plain vanilla credit default swaps (CDS), standardized and bespoken
collateralized debt obligations (CDO) and, in general, for any credit risk exposed A/L portfolio.
In this brief work we compute the market implied probability of default (PD) from market spreads and the
theoretical CDS spreads from historical default frequencies. The loss given default (LGD) probability distribution
has been constructed for a large pool portfolio of credit obligations exploiting a single-factor Gaussian copula with
a direct convolution algorithm computed at several default correlation parameters. Theoretical CDO tranche
prices have been calculated. We finally design stochastic cash-flow stream model simulations to test fair pricing,
compute credit value at risk (CV@R) and to evaluate the one year total future potential exposure (FPE) and
derive the value at risk (V@R) for a CDO equity tranche exposure.
Published
2011-08-15
How to Cite
ESPOSITO, Francesco P. . CREDIT RISK TOOLS: AN OVERVIEW. Journal of Advanced Studies in Finance, [S.l.], v. 2, n. 1, p. 18-25, aug. 2011. ISSN 2068-8393. Available at: <https://journals.aserspublishing.eu/jasf/article/view/43>. Date accessed: 22 jan. 2022.
Section
Journal of Advanced Studies in Finance