Structured Finance 360: From Credit Risk to Asset Swaps

Explore credit derivatives, their purpose, and the main forms traded, including credit default swaps, credit linked notes, cds forwards and options, pricing, and their link to bonds.

Examine credit derivatives, their uses, pricing, and trading forms, and how OTC structured products transfer credit risk within the fixed income universe of FX and rates.

Explore asset side versus liability side products, and show how cross currency swaps hedge dollar-denominated liabilities into INR for Infosys, reducing FX risk; highlight the structuring function across teams.

Understand how liability side credit risk affects balance sheets and capital allocation, and how rating agencies like Fitch, S&P, and Moody's grade credit worthiness from triple A to junk.

Learn how credit default swaps transfer and hedge credit risk, with protection buyers and sellers using premiums to manage exposure like an insurance contract.

Transfer credit risk with credit default swaps by letting a counterparty bet on a reference entity's default, with premium payments and a payoff for shortfalls on the obligation.

Explore how ISDA standardizes credit default swap contracts, detailing terms like reference obligation, fixed and floating payments, and the listed credit events that trigger payouts.

Learn how a cds contract defines obligations such as loans or bonds, how dealers trade and price cds across maturities, and why five-year cds are most liquid.

Price a credit default swap by modeling default probabilities, survival, and discounting at the risk-free rate, then compute the expected present value of spread and accrued premium.

Explain how the value of cds payments derives the premium from default probability, using discounting and accrued premiums; illustrate bootstrapping and mtm in a five-year Turkey cds at 83 bps.

Calculate accrued premium by marking the cds contract to market as spreads widen and default risk changes, using the difference between payments due to him and from him.

Bootstrap default probabilities from CDS term structure by equating the expected payments of the protection buyer and seller, solving for p1, p2, and beyond using risk-free rates and recovery.

Compute default probabilities from a bond term structure, pricing defaultable bonds with survival and recovery, and reveal how cds can replicate risky bonds as cash equivalents.

Explain how a defaultable bond plus CDS protection replicates a risk-free bond, illustrating bond-CDS equivalence and arbitrage in pricing around three-month LIBOR and basis points.

Explain how credit linked notes replicate bond risk with certificates of deposit, enabling five-year tenor access and credit exposure when an equivalent bond is unavailable, via CDs-bond basis.

Examine credit linked notes as customizable asset-side investments with features like range accruals and volatility hedging, then cover cds forwards and options and their pricing using volatility.

Transfers the bond’s total return from party B to party A, including coupons and price changes, with party A paying LIBOR plus 50 basis points.

Explore how an asset swap converts a fixed coupon bond into a floating one by swapping fixed payments for floating payments and determine asset swap spread to price to par.

Explore basket default swaps by deriving the price of a defaultable zero coupon bond and showing that its yield equals the risk-free rate plus the CDS spread.

Explore how the cds spread relates to loss on default and probability of default, and learn how basket default swaps use multi-entity correlations to affect risk and payoff.

Explain how two-default probabilities add when correlations are low. Show that basket cds options raise spreads and protection seller profits, while high correlation makes the basket resemble the worst asset.

Discover what credit derivatives are, how they are priced and valued, including synthetic CDOs, and the main forms like total return swaps and basket default swaps, plus hedging and speculation.

Explore securitization as a structured process converting a pool of assets into asset backed securities via an SPV, enabling investors to access asset returns while assets remain segregated.

Trace the birth of securitization and mortgage-backed securities, from 1960s liquidity gaps and information asymmetry to agency pass-through MBS guaranteed by Ginnie Mae, Freddie Mac, and Fannie Mae.

Explain pass-through securities, where an SPV pools mortgages and passes payments to investors after fees, with no asset or liability mismatch, versus pay-through and tranching to tailor coupons.

Tranching splits a 100 million asset pool into senior, mezzanine, and equity tranches (70/20/10) to tailor risk and return for investors, delivering 5%, 10%, and 55% yields; investors absorb shortfalls.

Explore how tranching creates risk-adjusted returns through a waterfall structure where categories A, B, and C absorb losses in sequence, with prepayments shaping cash flows.

Explore how securitization converts assets like commercial and residential mortgages, auto and consumer loans, or future cash flows into securities, including CMBS, RMBS, synthetic structures, and prepayment risk.

Explore the securitization process from asset origination to transfer into a shell SPV, detailing roles of originator, securitization adviser, custodian, lawyers, rating agencies, and investors, plus the structuring fee.

Explore how securitization uses an SPV to distribute notes to investors, with underwriters, custodians, and asset servicing shaping flows, fees, and maturity redemptions.