Credit Derivatives
Applications, Pricing, and Risk Management
This is a nice
introduction to credit derivatives and synthetic structures such as CDOs and
credit liked notes. The first half of the book covers the markets, the products
and applications. This material is largely non-technical. The second half of the
book looks at pricing and risk measurement. Here, the material is more technical
and makes modest use of calculus and probability theory. It is not sufficiently
detailed that you could actually implement one of the models. It is more suited
to familiarize readers with the general concepts behind applicable financial
engineering and risk management models. For that purpose, it does a nice job.
Contents
Introduction: the basics of credit derivatives
1. The market for credit derivatives
2. Credit derivatives products
3. Synthetic structures
4. Application of credit derivatives
5. The pricing of credit derivatives
6. Risk management with credit derivatives
I think the author
is strong in aspects of his subject but not others. He can be sloppy with minor
facts. For example, he comments that investors were "shocked" by the 2001 Enron
bankruptcy. Actually, the media had been reporting on the firm's troubles for
several months, so the bankruptcy was not unexpected.
His treatment of
value-at-risk (VaR) focuses on a delta-gamma VaR measure that is so flawed it is
useless. It would have been better if he had just not mention VaR.
The book's
qualitative discussions are well written and offer much to someone who is new to
the field. I like the book, but it faces so much competition. In a crowded field
of credit derivatives books, it doesn't stand out.
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