Chapter 26 CAIA Flashcards - Credit Risk & Credit Derivatives
Probability of Default (PD),
Probability of default (PD), which specifies the probability that the counterparty fails to meet its obligations
Exposure at Default (EAD),
Exposure at default (EAD), which specifies the nominal value of the position that is exposed to default at the time of default
Loss Given Default
Loss given default (LGD), which specifies the economic loss in case of default
Recovery Rate
The recovery rate is the percentage of the credit exposure that the lender ultimately receives through the bankruptcy process and all available remedies.
Risk Neutral Approach
A risk-neutral approach models financial characteristics, such as asset prices, within a framework that assumes that investors are risk neutral.
Risk Neutral Investor
A risk-neutral investor is an investor that requires the same rate of return on all investments, regardless of levels and types of risk, because the investor is indifferent with regard to how much risk is borne.
Model Calibration
To calibrate a model means to establish values for the key parameters in a model, such as a default probability or an asset volatility, typically using an analysis of market prices of highly liquid assets.
Hazard Rate
Hazard Rate is a term often used in the context of reduced-form models to denote the default rate.
Derivatives
Derivatives are cost-effective vehicles for the transfer of risk, with values driven by an underlying asset.
Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 717). Wiley. Edición de Kindle.
Credit Derivatives
Credit derivatives transfer credit risk from one party to another such that both parties view themselves as having an improved position as a result of the derivative. Roughly, most credit derivative transactions transfer the risk of default from a buyer of credit protection to a seller of credit protection.
Price Revelation
Price revelation, or price discovery, is the process of providing observable prices being used or offered by informed buyers and sellers.
Funded Credit Derivatives
Funded Credit Derivatives require cash outlays and create exposures similar to those gained from traditional investing in corporate bonds through the cash market.
Chambers, Donald R.; Anson, Mark J. P.; Black, Keith H.; Kazemi, Hossein. Alternative Investments: CAIA Level I (Wiley Finance) (p. 719). Wiley. Edición de Kindle.
Total Return Swap
In a total return swap, the credit protection buyer, typically the owner of the credit-risky asset, passes on the total return of the asset to the credit protection seller in return for a certain payment.
Credit Linked Notes
Credit-linked notes (CLNs) are bonds issued by one entity with an embedded credit option on one or more other entities.
