Credit Products and Derivatives A practical 3-day course presented by Rupesh Tailor This is a 3-day course covering corporate bonds and credit derivatives, from plain vanilla credit default swaps (single names and index) through to structured credit derivatives involving correlation products such as nth to default baskets, index tranches, synthetic collateralized debt obligations and more. The programme explores each product holistically, covering product mechanics and trading conventions, pricing, applications in investing and trading strategies including pitfalls to be aware of, risk management, infrastructure requirements and regulatory capital for banks. Practical application is emphasized throughout the programme via real-world case studies and workshops, which focus on international best practices and explore the experiences of a range of institutions. The course caters for participants at all experience levels, from beginner, through intermediate to advanced. Learning Objectives: - Gain familiarity with credit market infrastructure and credit products such as Credit Default Swaps, Index CDS & Options and Structured Credit Derivatives - Learn how to express credit views, take and manage credit risk - Learn how to structure, and manage the risks of, different types of Structured Credit Products including CLN’s, Quanto CDS and Tranched Products Who the course is for Prior knowledge • Credit traders and salespeople It is assumed that participants have a basic • Structurers, Asset managers understanding of Fixed Income markets and • ALM and treasury (Banks and Insurance Derivative instruments: forwards, call and put Companies) options. • Loan portfolio managers • Product control, finance and internal audit • Risk managers and risk controllers About LFS London Financial Studies is a specialist teaching resource concentrating exclusively on capital markets. Our course leaders have extensive practical experience in derivatives, quantitative analysis and econometrics. EMEA: +44 207 378 1050 [email protected] www.londonfs.com Credit Products and Derivatives A practical 3-day course presented by Rupesh Tailor Course Leader Rupesh Tailor Rupesh Tailor has a variety of experience working for sell-side and buy-side financial institutions, spanning analysis, trading and portfolio management of credit and equity products. Rupesh has focused on the European banks sector for the past twelve years at Goldman Sachs, Barclays Capital, Merrill Lynch, Auriga Investors and Morgan Stanley. Rupesh has applied the bank stress-testing, analysis and valuation techniques taught in this course to successfully predict banking stress in Iceland, Ireland and Spain in recent years. Practical application Tight focus What we teach is soundly based in current best practice. Our expertise is in capital markets. That is what we Our teachers have extensive practical experience in concentrate on. We offer courses and packages on a relevant capital markets. wide range of topics in this important and complex area. This tight focus enables us to deliver teaching that is uniquely effective and useful. Intellectual clarity Our teachers are first class communicators and acknowledged experts in their fields. They combine Theory and practice extensive practical experience with profound theoretical The professional and personal qualities of our course understanding. As skilled communicators, they get the leaders are crucial: effective learning can only be message across quickly and effectively. Course delivered by exceptional teachers. At London Financial exercises deliver effective practical learning that Studies we are able to attract prominent practitioners and participants remember long after leaving the classroom. academics all of whom have a clear and thorough grasp of their subjects and wide, practical experience. They are all expert communicators with the ability to Personal approach impart their knowledge in a clear and engaging way. We try to understand the needs of each person and structure courses and packages of real benefit to them. All our teaching groups are small enough to enable Accreditation individual needs to be assessed and met continually. LFS is recognized by the CFA and GARP as providing executive education of the highest quality. Members are eligible for CE/CPD credits from this event. Economic value We understand the commercial environment in which our clients operate. What we teach them delivers tangible benefits to their personal performance and to the bottom line of their companies. EMEA: +44 207 378 1050 [email protected] www.londonfs.com Credit Products and Derivatives Day 1 Credit Products – Corporate Bonds, Workshop 1: Pizza Express (restaurant company) – Calculating NPV of credit default swap and testing its Credit Default Swaps and Managing sensitivity to credit curve shape and recovery rate. Credit Risk Extracting survival probability curve. Comparing results to Bloomberg CDSW Introduction To Credit Market ● Overview of the corporate bond market – history, market size, key players, applications Index CDS & Index CDS Options ● Measuring credit spreads – spreads to government ● Product description benchmarks, I-spreads, z-spreads, par asset swap ● Market background – history, market size, key spreads players, applications ● What drives credit spreads – fundamental and ● What happens when an index constituent technical drivers? experiences a credit event? Case Study 4: iTraxx Europe Crossover S23 and Norske Skogindustrier ASA (distressed newsprint and magazine paper Single Name Credit Default Swaps producer) (CDS) ● Index skew – calculation, historical range and trading ● Product description ● Selection criteria and process for CDS index ● Market background – history, market size, key constituents. Case Study 5: Alstom SA (capital players, applications goods manufacturer) and Metsa Board Corporation (paper and packaging producer). What impact do ● Standard credit events – bankruptcy, failure to pay, index inclusion and exit have on single names? restructuring, (government intervention) ● Major CDS indices and relationships between them - ● Restructuring conventions – maturity limitation, Europe, US and Asia restructuring bucketing and economic implications. Case Study 1 – Allied Irish Banks Plc (Irish bank) ● How do CDS indices correlate to other asset classes subordinated CDS curve shape highly sensitive to (equities and government bonds)? which credit event transpired ● Correlation of CDS indices with corporate bond ● Credit event determination – decision process of the indices - calculating beta-adjusted hedge ratios ISDA Determinations Committee ● Liquidity and execution ● Settlement – how does the CDS auction process work? Case Study 2 – Codere SA (international gaming company) CDS Index Options ● Product mechanics – payers and receiver swaptions ● Standardized coupons and annuity risk ● Extracting survival probability curve from CDS curve ● Options strategies ● Pricing – CDS forwards and options ● Calculating CDS NPV and sensitivity parameters (CS01 and recovery delta). Case Study 3: Alcatel- ● Risk management – calculating and hedging greeks; Lucent (telecom equipment manufacturer) what do skew and smile look like in credit volatility ● Bloomberg CDSW tool – CDS pricing conventions & space? ISDA Standard Model ● Key CDS conventions – Europe, US, Asia ● ISDA 2014 Credit Derivatives Definitions – specific treatment of European bank and sovereign contracts ● Applications – sell side and buy-side; expressing credit views; hedging bond portfolios; pair trades; CLNs; curve trades; hedging loan portfolios EMEA: +44 207 378 1050 [email protected] www.londonfs.com Credit Products and Derivatives Day 1 (cont.) Day 2 Managing a CDS Portfolio – Market CDS Infrastructure and Structured Risk Credit Derivatives ● Key risk metrics for a CDS portfolio – CS01, CS100, CDS Infrastructure DTS, jump risk, theta, curve risk, recovery delta, ● Understanding ISDA and CDS agreements in relation sector risk, country risk, subordination risk, VAR, to CDS sVAR, expected shortfall. Case Study 6: Calculating ● Trade confirmations/matching and trade reporting to and interpreting risk metrics for a CDS portfolio trade repositories (DTCC, ICE). Case Study 14: ● Carry and rolldown – understanding rolldown P&L on Sample trade and operational process that follows IMM roll date. Case Study 7: Building a rolldown P&L ● Novations and terminations – mechanics and estimation tool matching through consent platforms (DTCC, ICE). Case Study 15: Sample novation and operational process that follows Managing a CDS Portfolio – ● Counterparty credit risk on CDS. Case Study 16: Opportunities and Pitfalls Not Well How a CVA desk manages counterparty credit risk on Captured by Market Risk Metrics CDS ● Central clearing – mechanics, margin requirements, ● CDS curve shapes – curve behaviour in distress. loss waterfall, responsibilities of operations team. Case Study 8: Understanding the CDS curve shape Case Study 17: Sample iTraxx Europe trade cleared for Noske Skogindustrier ASA (distressed newsprint at ICE and operational process that follows and magazine paper producer) ● CDS orphaning. Case Study 9: Grohe AG (bathroom products manufacturer) Price Verification ● Price verification/marking – assessment of data ● CDS succession and splits. Case Study 10: Hilton sources (MarkIT, Bloomberg) and third party Group Plc demerger of hotels business. Case Study valuation services. Required inputs 11: Banco Espirito Santo SA good bank-bad bank Case Study 18: split for third party valuation