Overview

Credit risk models invariably are mathematical, and can be dauntingly so. Nevertheless, an understanding of the impact of credit risk on the valuation of debt securities and derivatives is essential to investment analysis and risk management. The financial crisis that started in 2007 exposed the importance of counterparty credit risk; nowadays, CVA and DVA-credit valuation and debit (or debt) valuation adjustments, respectively-are part of the vocabulary of risk analysis in the post-Lehman world. This tutorial introduces the key parameters that drive CVA and DVA (the expected exposure to default loss, the probability of default, and the recovery rate) and demonstrates the impact of changes in credit risk on values of various types of debt securities and interest rate derivatives in a simplified format using diagrams and tables, albeit with some mathematics.

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9781515096566

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Don Smith is from Long Island, New York, but graduated from high school in Honolulu, Hawaii. He attended San Jose State University, earning a BA in Economics and having spent a study abroad year in Uppsala, Sweden. He served as a Peace Corps volunteer in Peru and then went on to get an MBA and Ph.D. in applied economics from the University of California at Berkeley. His doctoral dissertation was on a theory of credit union decision-making. Don has been at Boston University for over 30 years, teaching fixed income markets and financial risk management. He is the author of Bond Math: The Theory behind the Formulas, 2nd Edition (Wiley Finance, 2014) and currently is a curriculum consultant to the CFA Institute.

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