Malz, Financial Risk Management, Chapters 8 & 9 Study Notes cover the following learning objectives:
Chapter 8: Portfolio Credit Risk
Define and calculate default correlation for credit portfolios.
Identify drawbacks in using the correlation-based credit portfolio framework.
Assess the impact of correlation on a credit portfolio and its Credit VaR.
Describe the use of a single factor model to measure portfolio credit risk, including the impact of correlation.
Define beta and calculate the asset return correlation of any pair of firms using the single factor model.
Using the single factor model, estimate the probability of a joint default of any pair of credits and the default correlation between any pair of credits.
Describe how Credit VaR can be calculated using a simulation of joint defaults.
Assess the effect of granularity on Credit VaR.
Chapter 9: Structured Credit Risk
Describe common types of structured products.
Describe tranching and the distribution of credit losses in a securitization.
Describe a waterfall structure in a securitization.
Identify the key participants in the securitization process, and describe conflicts of interest that can arise in the process.
Compute and evaluate one or two iterations of interim cashflows in a three-tiered securitization structure.
Describe the treatment of excess spread in a securitization structure and estimate the value of the overcollateralization account at the end of each year.
Explain the tests on the excess spread that a custodian must go through at the end of each year to determine the cash flow to the overcollateralization account and to the equity noteholders.
Describe a simulation approach to calculating credit losses for different tranches in a securitization.
Explain how the default probabilities and default correlations affect the credit risk in a securitization.
Explain how default sensitivities for tranches are measured.
Describe risk factors that impact structured products.
Define implied correlation and describe how it can be measured.
Identify the motivations for using structured credit products.
After reviewing the notes you will be able to apply what you learned with practice questions.
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