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Credit derivative strategies : new thinking on managing risk and return PDF

238 Pages·2007·2.11 MB·English
by  DouglasRohan
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Praise for Credit Derivative Strategies New Thinking on Managing Risk and Return edited by Rohan Douglas “ The Credit Derivative Strategies guide is a great read for the experienced derivatives professional or those just starting out in the space. Both the core concepts of the derivatives market as well as the more complex CDO trading strategies come across with great lucidity. The guide would be a great complement to anybody’s investment library.” Brett M. Gearing Director, Structured Credit Products and Investments, Babson Capital Management LLC “ So rapid has been the growth of the credit derivatives market that it has outpaced the publication of educational material on the topic. Where texts do exist, they often carry an academic slant of limited application to the products and strategies employed by more market participants today. This well-researched volume goes a significant way toward addressing that imbalance. Written by practitioners with a wealth of both sell- and buy-side experience, it combines a rigorous approach to product pricing and valuation with chapters on the equally important—but much less often seen—topics of risk management and investment strategy. It like­ wise covers not only plain-vanilla CDS and options, but also explains how to both price and handle the tail risk inherent in CDO tranches. I recommend this book to portfolio managers, traders, risk managers, and researchers alike.” Matt King Head of Credit Products Strategy, Citigroup “An excellent mix of quantitative tools and in-depth examples” Francis A. Longstaff Allstate Professor of Insurance and Finance, UCLA Anderson School of Management “The rapid development of derivatives on credit products in the last decade has greatly facilitated the ability of participants in global capi­ tal markets to efficiently exchange credit risk. This has contributed to economic growth by increasing the efficiency of the market for users of capital. The insights into the latest evolutions of these products, contained in this book, provide an invaluable resource for a broad range of market participants and observers.” Stephen West Founding Partner, TriPoint Asset Management “ Credit Derivative Strategies meets the challenge of bringing fi nancial analysts and risk managers up to date on valuation, risk assessment, and product design in the fast-moving market for credit derivatives. The chapters are well selected for a mix of pragmatic institutional knowl­ edge, conceptual frameworks, and technical foundations. I recommend it highly.” Darrell Duffie Dean Witter Distinguished Professor of Finance, Codirector of the Credit Risk Executive Program, Graduate School of Business, Stanford University Credit Derivative Strategies Also available from Bloomberg Press The Credit Default Swap Basis by Moorad Choudhry Fixed-Income Securities and Derivatives Handbook: Analysis and Valuation by Moorad Choudhry Inside the Yield Book: The Classic That Created the Science of Bond Analysis by Sidney Homer and Martin L. Leibowitz, PhD Introduction to Option-Adjusted Spread Analysis: Revised and Expanded Third Edition of the OAS Classic by Tom Windas revised by Tom Miller Hedge Fund Risk Fundamentals: Solving the Risk Management and Transparency Challenge by Richard Horwitz ——— A complete list of our titles is available at www.bloomberg.com/books Attention Corporations This book is available for bulk purchase at special discount. Special editions or chapter reprints can also be customized to specifi cations. For information, please e-mail Bloomberg Press, [email protected], Attention: Director of Special Markets, or phone 212-617-7966. Credit Derivative Strategies , New Thinking on Managing Risk and Return edited by Rohan Douglas Bloomberg Press New York © 2007 by Rohan Douglas. All rights reserved. Protected under the Berne Convention. Printed in the United States of America. No part of this book may be reproduced, stored in a retrieval system, or trans­ mitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher except in the case of brief quotations embodied in critical articles and reviews. For information, please write: Permissions Department, Bloomberg Press, 731 Lexington Avenue, New York, NY 10022 or send an e-mail to [email protected]. BLOOMBERG, BLOOMBERG LEGAL, BLOOMBERG MARKETS, BLOOMBERG NEWS, BLOOMBERG PRESS, BLOOMBERG PROFESSIONAL, BLOOMBERG RADIO, BLOOMBERG TELEVISION, BLOOMBERG TERMINAL, and BLOOMBERG TRADEBOOK are trademarks and service marks of Bloomberg L.P. All rights reserved. The Chartered Financial Analyst® (CFA®) designation is a globally recognized standard for measuring the competence and integrity of investment professionals. This publication contains the authors’ opinions and is designed to provide accurate and authoritative information. It is sold with the understanding that the authors, publisher, and Bloomberg L.P. are not engaged in rendering legal, accounting, investment-planning, or other professional advice. The reader should seek the services of a qualified professional for such advice; the authors, publisher, and Bloomberg L.P. cannot be held responsible for any loss incurred as a result of specifi c investments or planning decisions made by the reader. First edition published 2007 1 3 5 7 9 10 8 6 4 2 Library of Congress Cataloging-in-Publication Data Credit derivative strategies : new thinking on managing risk and return / edited by Rohan Douglas. p. cm. Summary: “Credit Derivatives are financial contracts that transfer credit risk--the risk that a debtor will not repay a loan--between parties. Credit Derivative Strategies describes for professional inves­ tors current ways of participating in this rapidly expanding market, including how to select credit hedge funds, analyze event risk, find relative value opportunities, and choose synthetic collateralized debt obligations (CDOs)”--Provided by publisher. Includes bibliographical references and index. ISBN 978-1-57660-187-7 (alk. paper) 1. Credit derivatives. 2. Risk management. I. Douglas, Rohan. HG6024.A3C737 2007 332.63'2--dc22 2007014284 C O N T E N T S About the Contributors ..................................................... vii Introduction ...................................................................1 PART ONE | INVESTMENT STRATEGIES 1 Eight Relative Value Opportunities ..................................7 Christoph Klein, CFA, Head of Credit Fixed Income and Partner, TriPoint Asset Management 2 Distressed Debt Strategies .............................................25 Steven D. Persky, CFA, Founder and Managing Partner, CEO, Dalton Investments 3 Four Synthetic CDO Trading Strategies .........................33 Andrea Petrelli, Director of European CDO Trading Risk Management, Credit Suisse Jun Zhang, PhD, CFA, Head of U.S. CDO Risk Management, Credit Suisse Santa Federico, Chief Risk Officer, Perry Capital Vivek Kapoor, Executive Director, UBS 4 Integrating Credit Hedge Funds into a Portfolio of Investments ..............................................................65 Richard Horwitz, Managing Director, Hedge Fund Development and Management Group, Merrill Lynch Erin Roye Simpson, Associate, Hedge Fund Development and Management Group, Merrill Lynch PART TWO | RISK MANAGEMENT STRATEGIES 5 Risk Management of Credit Derivatives..........................93 Santa Federico, Chief Risk Officer, Perry Capital Andrea Petrelli, Director of European CDO Trading Risk Management, Credit Suisse Jun Zhang, PhD, CFA, Head of U.S. CDO Risk Management, Credit Suisse Vivek Kapoor, Executive Director, UBS 6 Risk Management for Multistrategy Funds ................... 115 Christoph Klein, CFA, Head of Credit Fixed Income and Partner, TriPoint Asset Management 7 Integrating Event Risk in Portfolio Construction .......... 123 Alla Gil, Former Managing Director, International Capital Solutions Group, Nomura Securities International PART THREE | PRICING, PRODUCTS, AND PROCEDURES 8 Pricing Models ............................................................ 145 Rohan Douglas, Founder and CEO, Quantifi Inc. Peter Rivera, Professor of Business Technologies, SUNY-Dutchess 9 CDS Valuation ............................................................ 161 Santa Federico, Chief Risk Officer, Perry Capital Andrea Petrelli, Director of European CDO Trading Risk Management, Credit Suisse Jun Zhang, PhD, CFA, Head of U.S. CDO Risk Management, Credit Suisse Vivek Kapoor, Executive Director, UBS 10 CDO Valuation ........................................................... 167 Santa Federico, Chief Risk Officer, Perry Capital Andrea Petrelli, Director of European CDO Trading Risk Management, Credit Suisse Jun Zhang, PhD, CFA, Head of U.S. CDO Risk Management, Credit Suisse Vivek Kapoor, Executive Director, UBS 11 Credit Derivative Products ............................................175 Peter Rivera, Professor of Business Technologies, SUNY-Dutchess Index ............................................................................ 217 CFA Institute Professional Development Qualifi ed Activity (7.5 hours) ................................. 224 A B O U T THE C O N T R I B U T O R S Rohan Douglas, editor of this volume, is the founder and CEO of Quantifi Inc., a leading provider of pricing models and risk analysis tools for struc­ tured credit. He has more than twenty-five years of experience in the global fi nancial industry. Prior to founding Quantifi, he was the director of global credit derivatives research at Citigroup and Salomon Smith Barney where he worked for ten years. Douglas has worked in interest-rate derivatives, emerging markets, and global fixed income. Douglas is also an adjunct professor in the financial engineering program at Polytechnic University in New York and at the Macquarie University Applied Finance Centre in Australia and Singapore. For many years, Douglas has spoken at confer­ ences and seminars on the subject of credit derivatives. Santa Federico is the chief risk officer for Perry Capital, a $13 billion mul­ tistrategy hedge fund. Prior to working at Perry Capital, he was managing director of strategic risk management at Credit Suisse First Boston and head market risk manager for Salomon Smith Barney/Citigroup. Besides risk management, he has held various positions in portfolio management, de­ rivatives trading, and quantitative research. He has twenty years of fi nancial industry experience and holds degrees in physics from Princeton University and the École Centrale de Paris. Alla Gil has fourteen years of financial experience working at major banks, such as Citigroup, Goldman Sachs, and CIBC. Most recently, she was the managing director of International Capital Solutions Group for Nomura Securities International. Her group developed innovative and practical financial solutions by quantifying clients’ exposures to different risk facets and identifying the most efficient risk mitigation strategies. vii

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