Shared Flashcard Set

Details

Hull 24
Credit risk
6
Finance
Professional
03/09/2012

Additional Finance Flashcards

 


 

Cards

Term
Structure of Credit Default Swap(CDS)
Definition
Most popular type of credit derivative
Protects against a default of a company. Matches a bond from the reference entity with a spread. If ref entity defaults, holder can sell bond for notional value to seller.
Term
2 types of CDS settlement
Definition
Physical settlement: seller pays entire face value
cash settlement: the seller pays difference between face value and post credit event value
Term
Value of CDS
Definition
spread *(value of extra spread payments + value of recoveries) - value of expected payoff
Term
Subprime securties (3)
Definition
  1. Ratio of mortgage values to home prices increased
  2. Increased use of second lien loans
  3. increased issuance of mortgages with little/no documentation
Term
Conclusions CJK
Definition
  1. market for structured credit will stay small, as investors will be unwillingly to invest in complex securities
  2. Credit rating process should improve (less AAA)
  3. investors need to be able to distinguish between single-name and structured, and amount of systematic risk
Term
Collaterialized Debt Obligation
Definition

A security is a type of Asset Backed Security where the pool of assets consists of bonds issued by corporations or countries

The pool of assets is sliced into tranches, with each one corresponding to a different amount of defaults.

A synthetic CDO can be created using Credit Default Swaps, since those replicate credit risk on a bond

 

Supporting users have an ad free experience!