Comments on: Credit Derivatives: A Primer on Credit Risk, Modeling, and Instruments

By: S. Murthy

S. Murthy — Fri, 30 Jul 2010 00:35:55 +0000

Review by S. Murthy for Credit Derivatives: A Primer on Credit Risk, Modeling, and Instruments Rating: Decent and accessible read, but has many typographical errors. I mean guys, this is a text book, show your readers some respect by doing adequate proof reading. 1 example:
Fig 3-15, page 99 y axis should be default prob., not credit spread as labeled.

By: Craig L. Howe

Craig L. Howe — Fri, 30 Jul 2010 00:18:28 +0000

Review by Craig L. Howe for Credit Derivatives: A Primer on Credit Risk, Modeling, and Instruments Rating: If you are new to the burgeoning credit risk market, this is the book. Anyone who has lent money worries about the risk of default. What to do about that worry is of course a different story. Enter credit derivatives.

Using clear language concisely, the authors explain the basics of the credit market, credit derivatives, how they work and how to use them.

They explain how credit risk valued and measured. Key concepts, such as credit spreads and risk transfer are covered in a thoughtful and thorough fashion. In my reading, I have not found a better explanation of the role of this market and its functions.

Moving into second part of the book, the authors tackle credit risk models, how they can be used to describe and predict risk events. They discuss three approaches: structural models, such as the Merton, Black and Cox; empirical models such as Z-score and reduced form models, such as Jarrow-Turnbull.

Finally the authors describe actual credit derivatives, total return swaps, credit spread options and credit linked notes. They devote two chapters to collateral debt options and credit default swaps.

Obviously this is not a book for a seasoned professional. However, if you are new to this market or perhaps simply worried about the risk of being repaid on some money you have lent this book will provide you with the background and understanding required to deploy credit risk strategies effectively and confidently.

By: Charles Ashbacher

Charles Ashbacher — Fri, 30 Jul 2010 00:01:23 +0000

Review by Charles Ashbacher for Credit Derivatives: A Primer on Credit Risk, Modeling, and Instruments Rating: During the course of the last several years, I have had only a passing knowledge of credit derivatives. I have encountered the subject on occasion, but in little more depth than something equivalent to reading, "Credit derivatives are an important component of the modern economy." This book certainly reaches the level expounded in the title, namely being an excellent primer on what they are and the important role they play.
The first chapter explains exactly what credit derivatives are. Using mathematical modeling techniques, an accurate estimate is made of the true credit risk based on the likelihood of partial or total default. This allows the holder of a debt to sell it to someone willing to assume the debt for a price that both agree is reasonable. The seller then gets immediate payment and the buyer has enough margin to make a profit.
After credit derivatives are defined and examples given, precise definitions of credit and credit risk are given. Very sophisticated mathematics is used in the models that describe how the values are derived. Probability theory is also used in the computations, as most of the results are based on the likelihood that the debtor will repay the debt.
This book is not easy to read as you need a significant background in microeconomics and must be able to read and understand formulas. However, it is well worth the effort to read and understand it. Credit derivatives are a very important tool that can be used to generate significant capital quickly, reduce your credit risk or to make significant profits. Like nearly everything else, none of this is possible without the knowledge necessary to do it right. This book will provide that knowledge; I learned a lot while reading it.

By: Raghurami Reddy Etukuru

Raghurami Reddy Etukuru — Thu, 29 Jul 2010 23:04:18 +0000

Review by Raghurami Reddy Etukuru for Credit Derivatives: A Primer on Credit Risk, Modeling, and Instruments Rating: This is easy to understand and more academic oriented book. For any body who wants to become master in the field of credit risk and credit derivatives, this book will act as a gateway. Modeling Credit risk using structural approach is explained in about 60 pages and it is very clear.CDO pricing is detailed with examples and shows how to price CDO with correlation using Monte Carlo simulation and Cholesky decomposition.

However this book does not talk about ISDA documentation and from the trading point of view. The book "Credit Derivatives: Risk Management, Trading and Investing by Geoff Chaplin" focuses more from the point of view of trading and ISDA documentation. Reading Chaplin's book after Chacko's book will take the reader into next step.

For the professional who want to become expert in modeling, the must read is "Credit Derivatives Pricing Models: Model, Pricing and Implementation by Philipp J.Schönbucher". This requires lot of mathematical especially calculus and probability background and prior knowledge of Credit Risk and Credit Derivatives.

I would recommend Chacko's, Chaplin's and Phillip's books in the order in order to become proficient in Credit Derivatives.

Credit Derivatives: Risk Management, Trading and Investing (The Wiley Finance Series)
Credit Derivatives Pricing Models: Model, Pricing and Implementation

By: Craig Matteson

Craig Matteson — Thu, 29 Jul 2010 22:54:17 +0000

Review by Craig Matteson for Credit Derivatives: A Primer on Credit Risk, Modeling, and Instruments Rating: I quite enjoyed this book and recommend it strongly for any business student (BBA or MBA) who is interested in this topic. For finance majors who don't have a firm grip on credit risk and the instruments used to moderate its effects, this is a must read. It is well written, clearly illustrated, and is not excessively technical.

The six chapters are divided into three parts. 1) What is Credit Risk, 2) Credit Risk Modeling, and 3) Typical Credit Derivatives. The introduction and chapter on credit risk are especially helpful to anyone wanting to gain a more nuanced understanding of what credit risk is.

The middle chapters comprising part 2 discuss the Merton model and options in discussing how credit risk can be evaluated and priced. There are appendices that discuss other models. For the purposes of this book, the discussion here is enough. As a primer, it cannot also be the last word in the technical evaluation of the various kinds of risk and there are other books for the more sophisticated audience (as well as journal articles).

Credit Swaps and Collateralized Debt Obligations are discussed in a few flavors each as the typical credit derivatives. Sometimes people get intimidated or confused by derivatives. However, they are simply other kinds of financial mechanisms that create financial obligations depending on some aspect of the performance of some other instrument. You buy or sell them depending on whether you want to lay off risk and variability to someone else or are willing to buy risk in order to collect the premium and add variability to your portfolio.

A good little book for the right audience.