Structured Credit Products

Updated coverage of structured credit products with in-depth coverage of the latest developments

Structured credit products are one of today's fastest growing investment and risk management mechanisms, and a focus of innovation and creativity in the capital markets. The building blocks of these products are credit derivatives, which are among the most widely used products in finance. This book offers a succinct and focused description of the main credit derivative instruments, as well as the more complex products such as synthetic collateralized debt obligations. This new edition features updated case studies from Europe and Asia, the latest developments in synthetic structures, the impact of the subprime meltdown, along with models and teaching aids.

Moorad Choudhry returns with this excellent update of the credit derivatives market. The second edition of his classic work is, like the subject matter itself, at the forefront of the financial industry. It deserves a wide readership.
—Dr Didier Joannas
Regional Director, Thomson Reuters, Hong Kong

This is the perfect companion for both experienced and entry level professionals working in the structured credit fraternity. It is an erudite, insightful and enjoyable read that successfully demystifies one of the most topical subject areas in banking today, while also providing important practical examples that link the theory to the job itself.
—Dr James Berriman
Global Pricing Unit, Royal Bank of Scotland

Moorad Choudhry has earned a deserved reputation from both academics and practitioners as one of the leading practical yet rigorous authors of finance books. In this Second Edition, his practical knowledge of credit derivatives keeps the audience engaged with straightforward explanations of complicated structures, and an accessible level of mathematical sophistication necessary to understand structured credit products. The author offers complete, rigorous analysis while avoiding overuse of mathematical formulas and carefully balanced practical and theoretical aspects of the subject. I strongly recommend this book for those wishing to gain an intuitive understanding of structured credit products, from practitioners to students of finance!
—Mohamoud Barre Dualeh
Senior Product Developer, Abu Dhabi Commercial Bank, UAE

This is THE book for credit derivative trading. From first steps to advanced trading strategies, this is invaluable. Well written and insightful, perfect for ad hoc reference or reading cover to cover.
—Andrew Benson
ETF Market Making, KBC Peel Hunt, London

Professor Choudhry has inspired me to really get into credit derivatives. It’s great to be lectured by someone with such energy and practical hands-on experience, as well as the ability to get stuck into the details.
—George Whicheloe
Equity-Linked Technology, Merrill Lynch, London

Moorad Choudhry is Head of Treasury at Europe Arab Bank plc in London. He is a Visiting Professor at the Department of Economics at London Metropolitan University.

Foreword Professor Darrell Duffie, Stanford University xi

Preface xv

Acknowledgements xix

About the Author xxi

Prologue The 2007–2008 credit and liquidity crunch: Impact on structured credit markets 1

Part I Credit risk and credit derivative instruments 21

Chapter 1 Credit risk 27

Chapter 2 Credit derivatives I: Unfunded instruments 57

Chapter 3 Credit derivatives II: Funded instruments 163

Chapter 4 Credit analysis and relative value measurement 185

Chapter 5 Credit derivatives III: Applications 203

Chapter 6 Credit derivatives pricing and valuation 227

Chapter 7 Credit default swap pricing 251

Chapter 8 The asset swap—credit default swap basis I: The asset swap pricing of credit default swaps 281

Chapter 9 The credit default swap basis II: Analysing the relationship between cash and synthetic markets 293

Chapter 10 Trading the credit default swap basis: Illustrating positive and negative basis arbitrage trades 343

Chapter 11 Syndicated loans, loan-only credit default swaps and CDS legal documentation 371

Part II Structured credit products and synthetic securitisation 403

Chapter 12 An introduction to securitisation 405

Chapter 13 Synthetic collateralised debt obligations 445

Chapter 14 CDO valuation and cash flow waterfall models 507

Chapter 15 Synthetic conduits and credit derivative funding structures 533

Part III CD-R 559

Chapter 16 Files on the accompanying CD-R 561

Contributing authors 567

Afterword: Econometrics, finance and football 569

Glossary 575

Index 589

Moorad Choudhry is Head of Treasury at Europe Arab Bank plc in London, and Visiting Professor at the Department of Economics, London Metropolitan University.
He lives in Surrey, England.

Structured credit products including synthetic collateralised debt obligations were the subject of considerable media scrutiny in the wake of the US mortgage market crash, as banks around the world suffered large losses on holdings in such products. At the same time, investors that had shorted these exposures using credit derivatives profited from the downturn in the market.

As risk management tools, credit derivatives remain as important as ever Professor Moorad Choudhry’s best-selling book on credit derivatives brings readers up to date with developments in the market following the 2007-2008 financial crisis, and covers changes in the markets since then.

This Second Edition provides an update on credit derivative products and their uses. New material is presented on:

• latest structured credit products and synthetic funding structures;
• the valuation models used to price synthetic securitisation deals;
• the credit derivative Big Bang;
• the CDS basis.

The author presents case studies and practical illustrations from the market. The accompanying CD-R includes pricing models for credit derivatives synthetic CDO notes, diversity models and cash flow waterfalls.

Moorad Choudhry returns with this excellent update of the credit derivatives market. The second edition of his classic work is, like the subject matter itself, at the forefront of the financial industry. It deserves a wide readership.
—Dr Didier Joannas
Regional Director, Thomson Reuters, Hong Kong

This is the perfect companion for both experienced and entry level professionals working in the structured credit fraternity. It is an erudite, insightful and enjoyable read that successfully demystifies one of the most topical subject areas in banking today, while also providing important practical examples that link the theory to the job itself.
—Dr James Berriman
Global Pricing Unit, Royal Bank of Scotland

Moorad Choudhry has earned a deserved reputation from both academics and practitioners as one of the leading practical yet rigorous authors of finance books. In this Second Edition, his practical knowledge of credit derivatives keeps the audience engaged with straightforward explanations of complicated structures, and an accessible level of mathematical sophistication necessary to understand structured credit products. The author offers complete, rigorous analysis while avoiding overuse of mathematical formulas and carefully balanced practical and theoretical aspects of the subject. I strongly recommend this book for those wishing to gain an intuitive understanding of structured credit products, from practitioners to students of finance!
—Mohamoud Barre Dualeh
Senior Product Developer, Abu Dhabi Commercial Bank, UAE

This is THE book for credit derivative trading. From first steps to advanced trading strategies, this is invaluable. Well written and insightful, perfect for ad hoc reference or reading cover to cover.
—Andrew Benson
ETF Market Making, KBC Peel Hunt, London

Professor Choudhry has inspired me to really get into credit derivatives. It’s great to be lectured by someone with such energy and practical hands-on experience, as well as the ability to get stuck into the details.
—George Whicheloe
Equity-Linked Technology, Merrill Lynch, London