Structured Finance Mastery: From Foundations to Derivatives

Explore credit derivatives, credit risk transfer, and trading forms such as credit default swaps (CDS), credit linked notes, asset swaps, and total return swaps, with simplified pricing insights.

Explore how credit derivatives transfer and manage credit risk in the OTC structured products market, and learn their pricing, forms, and uses on the asset and liability sides.

Analyze asset side and liability side products, including cross-currency swaps that convert dollar liabilities into INR, and see how structuring coordinates sales, trading, quants, and legal in OTC derivatives.

Learn how credit risk is quantified by credit ratings from Fitch, S&P, and Moody’s, distinguish investment grade from junk bonds, and define default as a credit event.

Learn how credit default swaps transfer credit risk, hedge and speculate using a cds contract that acts like insurance between protection buyer and seller.

Credit default swaps resemble insurance but involve a separate counterparty betting on a reference entity's obligation. They transfer credit risk, hedge positions, or enable speculation on default.

Define the CDS using a standard template, detailing reference obligation, reference entity, fixed and floating payments, and core credit events such as bankruptcy, acceleration, and restructuring.

Explore how CDS contracts are priced in dealer markets, with obligations ranging from loans to bonds, traded on sovereigns like Greece and corporates like SBI and HDFC, including five-year contracts.

Price a CDS using a simple model with Turkey as reference, 5% risk-free rate, 2% annual default probability, and notional 100 to derive coupon and accrued premium PV.

Derive the CDS premium by equating expected present value payments to market prices, here 83 basis points for a five-year Turkey CDS, then bootstrapping and MTM explain shifts.

Analyze how credit default swap mark-to-market works by comparing expected payments, default probabilities, and premium shifts, and show how wider spreads alter its value for buyers and sellers.

Bootstrap default probabilities from CDS term structures by solving for p1, p2, p3 using observed CDS prices, discount factors, and a 5% risk-free rate with a 40% recovery.

Extract default probabilities from bond structures by pricing risky bonds with survival probabilities and recovery, then replicate bonds with cds, illustrating cash versus synthetic cash.

Explain how a defaultable bond plus CDS protection replicates a risk-free bond, showing bond CDS equivalence and the arbitrage that enforces efficiency. Demonstrate credit risk hedging yields near risk-free.

Explain how credit linked notes replicate bond risk using CDS, enabling hedging and tailored tenors when direct bonds are unavailable.

Compare CDS with bonds, explain synthetic versus cash, and explore customizable credit linked notes with range accruals, forwards and options, priced using volatility and Black-Scholes.

Learn how a total return swap transfers all bond returns from party b to party a, enabling cheaper financing and capturing coupons and price changes.

An asset swap converts a fixed coupon bond into a floating one by swapping fixed payments for libor plus a spread, priced to par.

Explore basket default swaps and derive pricing for a zero coupon bond, showing how a default double bond equals a risk-free asset plus a cds spread.

Show that the CDS spread is proportional to the loss on default and to the probability of default, then explore basket defaults, first-to-default structures, and the impact of correlation.

Learn how two default probabilities add under zero correlation, and how one correlation makes the basket resemble the worst asset, boosting CDS spreads for protection sellers.

Understand how credit derivatives transfer credit risk through credit default swaps, total return swaps, basket default swaps, and synthetic CDOs for hedging, speculation, pricing, and valuation basics.