Description

The size of the global derivatives market has by some estimates reached a notional value of a quadrillion dollars. Among the primary users of derivatives are commodity-based corporations, banks, pension funds, insurance companies, mutual funds, hedge funds, and private investors. The credit worthiness of different parties to these contracts has been under focus since the credit crisis of 2008, which led to many institutions going bankrupt due to a lack of focus on credit risk. Credit risk has emerged as the major risk in dealing with derivative contracts. In order for derivatives users to manage the associated credit risk, they must develop models and procedures required to measure credit risk in monetary terms.
This course identifies the sources of credit risk in widely used derivatives, with a distinction made between over-the-counter versus market traded derivatives. The course also introduces the credit equivalent risk framework, which utilizes statistical techniques to determine a risk factor that is used as an input to determine potential credit loss. In determining potential credit loss, the course also considers the probability of default and recovery rates determined through a credit rating process, analysts’ judgements, and other information sources.