Study Notes: Hull, Options, Futures, and Other Derivatives, Chapters 24 & 25

Hull, Options, Futures, and Other Derivatives, Chapters 24 & 25 Study Notes cover the following learning objectives:

Chapter 24. Credit Risk

Assess the credit risks of derivatives.
Define credit valuation adjustment (CVA) and debt valuation adjustment (DVA).
Calculate the probability of default using credit spreads.
Describe, compare, and contrast various credit risk mitigants and their role in credit analysis.
Describe the significance of estimating default correlation for credit portfolios and distinguish between reduced form and structural default correlation models.
Describe the Gaussian copula model for time to default and calculate the probability of default using the one-factor Gaussian copula model.
Describe how to estimate credit VaR using the Gaussian copula and the CreditMetrics approach.

Chapter 25. Credit Derivatives

Describe a credit derivative, credit default swap (CDS), total return swap, collateralized debt obligation (CDO).
Explain how to account for credit risk exposure in valuing a CDS.
Identify the default probabilities used to value a CDS.
Evaluate the use of credit indices and fixed coupons in pricing CDS transactions.
Define CDS forwards and CDS options.
Describe the process of valuing a synthetic CDO using the spread payments approach and the Gaussian copula model of time to default approach.
Define the two measures of implied correlation: compound (tranche) correlation and base correlation.
Discuss alternative approaches used to estimate default correlation.

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