This is a unique
book. There is much that I could say that is negative about it—and I will do so
shortly—but it accomplishes something that no other book does, and it does a
surprisingly good job at it.
The purpose of the
book is to take readers with little or no prior experience with finance or
credit risk and get them to a level where, not only do they understand what
credit derivatives and CDOs are, but they have a reasonably deep understanding
of how these instruments are priced.
The book is divided into three sections that build
one upon the other. These
explain,
in very elementary terms, what credit risk is;
describe,
with some mathematics, structural and reduced form models for credit
derivatives; and
introduce
credit derivatives and collateralized debt obligations (CDOs), and explain
how they are priced.
The authors do this in just 256 pages. What
they give up is context. Talk about not seeing the forest for the trees! The
unsophisticated readers it targets are likely to feel they are learning much
about a very small part of a much bigger story. Indeed, they are.
The first section
of the book is probably too elementary. I can't imagine anyone who doesn't even
know what credit risk is picking up a book on credit derivatives. The authors
could have left out the example of you lending a friend money and worrying if he
will pay you back. Definitions tend to be adequate for a grammar school civics
class, but not for a corporate treasury.
Contents
1. Introduction
2. About credit risk
3. Modeling
credit risk : structural approach
4.
Modeling credit risk : alternative approaches
5. Credit default swaps
6.
Collateralized debt obligations
After such a
watered-down first section, the second section on structural and reduced form
credit risk models is like an abrupt cold shower. Discussions are sufficiently
technical to walk readers through some basic computations. They provide enough
quantitative fire power to make anyone dangerous.
Towards the end of
the book, you may feel a bit like Goldilocks. If the first section was too
elementary, and the second section to mathematical, the third section may be
just right. This is where everything comes together. Not only are credit
derivatives and CDOs introduced, but there is a sophisticated discussion of how
they are priced. Note that there is plenty of hand waving and technical
terms are used in a less than formal manner, but the result is quite impressive.
Even quantitative professionals will appreciate how easily the authors build
understanding of concepts—not only for pricing single-name credits but for
multi-name credits as well. Anyone who is new to credit derivatives pricing will
benefit from this section.
The four authors are mostly academics, and their
book may be a case of too many chefs spoiling
the broth. Some parts (especially the last few chapters) are extremely well written.
Others are sloppy, with the authors sometimes saying things I am sure they don't
intend.
Anyway, the third
section is outstanding. Feel free to skim or skip the first two. [November 4, 2006]
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explain,
in very elementary terms, what credit risk is;